Musical homes
It is not commonly realised that a taxpayer’s ‘main
residence’ is not necessarily the place where they actually
live. In a variety of circumstances a taxpayer may live in one
home but have another home treated as their main residence for
capital gains tax purposes. This gives rise to interesting tax
planning possibilities including those noted below.
Negatively geared homes
Once a
property becomes a person’s main residence the person may elect
to continue to treat it as their main residence even if they
subsequently move homes. The relevant deeming provisions operate
until the earlier of the following times:
- when
the person elects another main residence;
- six
years if the property is rented out; or
- until
the person moves back in.
The most common application of the main residence exemption is
in situations where, for example, a person with a highly geared
residence is posted overseas for three years. The taxpayer
considers selling his/her residence, however, closer analysis
reveals it would be better to rent out the property whilst
electing to retain it as a deemed main residence.
Accordingly,
the taxpayer elects to generate negative gearing losses whilst
retaining ownership of an (effectively) capital gains tax-exempt
property.
Main residence developers
In
another example, a client with an existing main residence
purchased land and built a new home. During the development, which
took two years, the client lived in his old home. Shortly after
moving into the new property the client received an offer to sell
it at a substantial profit.
The
client was advised by his tax agent to exercise a statutory
election to treat the new property as having been his main
residence since the date he acquired the land. This made the
substantial profit from the sale of the new property entirely
tax-free.
A
collateral consequence was that the taxpayer’s old home was
deemed to have ceased to have been his main residence from the
date he acquired the land on which he subsequently built his new
home. However, this did not give rise to any tax liabilities
because the old residence had been had been acquired prior to 20
September 1985.
This is article appeared in Thomson’s InTax
magazine (September 2007); Australia’s best independent monthly
tax magazine. It provides concise reports of the latest tax news,
plus the practical implications of tax developments in an
easy-to-read magazine format. To find out more, phone Thomson
Customer Service on 1300 304 197.
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