Newlyweds James and Gabi want capital gains tax advice as they plan the sale of one of their properties. Chartered accountant GAIL FREEMAN guides them through the complex implications of the main residence exemption.

James and Gabi tied the knot in January 2024, celebrating with a rustic, country-style wedding in Canberra with great pomp and flair.

Gabi, a homeowner since March 2021, decided to move out of her Kingston apartment (purchased for $800,000) and into James’ Googong property, which he bought for $1.2 million in January 2021.

The couple has now decided to sell Gabi’s Kingston apartment to help finance a new coastal holiday unit together – an important milestone that brings financial opportunity and the need for careful capital gains tax (CGT) planning.

“The Australian Taxation Office (ATO) only allows a one-home rule from the date you become spouses,” I told them.

“For CGT purposes, you must each decide which is your main residence – and it does not have to be the same one.

“Your options in this scenario are: both of you treating the Googong dwelling as your main residence; both of you treating the Kingston apartment as your main residence; or each of you nominating a different dwelling.”

I clarified that if they chose the latter, the CGT exemption must be shared. To make it clear, I explained: “For the period in which both properties are nominated, each person can claim only a 50 per cent main residence exemption on their respective property.”

The best strategy for spouses with different main residences is to nominate the property with the greater potential for an unrealised capital gain.

The Googong property was the stronger choice – as a property expected to be held for longer, it will likely accrue a larger gain over time, making the exemption more valuable when it is eventually sold.

I advised Gabi that she would be better off accepting a partial capital gains tax liability on the Kingston apartment from the date she moved in with James to their Googong home.

In her case, the tax payable will be reduced because she is entitled to a partial main residence exemption for the period she lived in the Kingston property, and she can also apply the 50 per cent CGT discount to the remaining taxable gain.

I also recommended that Gabi obtain a professional valuation of her Kingston apartment at the date she moved out. This valuation would establish the property’s market value from that point onward – an important step under the main residence exemption rules.

By doing so, Gabi can disregard any capital gain made while the property was her home, covering the period from March 2021 to January 2024.

Capturing that value effectively locks in the strong price growth Canberra’s housing market has enjoyed in recent years and ensures that only gains made after she left the property are subject to tax.

Claiming the main residence exemption incorrectly can prove costly. The ATO can amend your assessment, require you to pay the correct CGT, charge interest on the shortfall, and impose penalties where the mistake is considered careless, reckless or deliberate. To make it worse, these penalties and interest are no longer deductible.

Written by Chetan Chopra.

If you need help with CGT, the main residence exemption, or any other tax-related matters, contact the experts at Gail Freeman & Co Pty Ltd on 02 6295 2844, email [email protected] or visit gailfreeman.com.au

Disclaimer
This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser. Authorised Representative of Lifespan Financial Planning Pty Ltd AFS Lic No. 229892.

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