Tax Q&A: If we sell our house, how will the CGT be calculated?

Q: My husband and I bought our first home 30km from the Melbourne CBD in 2014. At settlement, the house was tenanted. The tenants moved out eight months later, and we then occupied the house for about 12 months before deciding to tenant it again and go back to renting closer to the CBD.

Soon, we will be moving back into the house and it will become our main residence.

While it was tenanted, we were always renting and didn’t own any other property. I thought we might be exempt from CGT due to the six-year rule, but I’m not sure now because recently I’ve been told that the initial eight months changed things.

We bought the house as our first home and got a 50% reduction in stamp duty. As I understood it at the time, we had to move into it within 12 months to qualify for the first home owner discount. We waited for the lease to be up and then moved in.

My question is, if we sell the house in a couple of years, how will the CGT be calculated?

Thanks, Kayla

A: Capital gain is calculated as the difference between the sale price and ‘cost base’, with a few concessions, including the main residence exemption and 50% discount. How the cost base of the property is determined depends on how it was first treated after settlement – was it established as a main residence (usually by occupying it) or rented out and rental income received?

Where a property is rented or available for rent after settlement, it will be liable for capital gains tax (CGT) when sold at a profi t/gain. This includes where the intention was to occupy the property as a main residence, but due to a pre-existing lease commenced by the vendor that expired well after settlement, rent was received for the period between settlement and occupation. This means only a partial main residence exemption would be available on sale.

How the cost base of the property is determined depends on how it was first treated after settlement... as a main residence or rented out

The capital gain on sale will be apportioned between the days the property was occupied as a main residence and the days it was a rental. After establishing it as a main residence, the six-year absence rule extends the exemption period. Reoccupying the property and re-establishing it as a main residence will increase the proportion of time it is calculated as exempt. In this situation the assessable component relates to the eight-month rental as a portion of the total ownership period.

The condition for exemption is that no other property is nominated as a main residence.

So, how much CGT is payable in a case of partial exemption? For CGT purposes, the cost base will include the purchase price plus stamp duty, legal fees on purchase and sale, as well as agent’s commission on sale. Improvement costs (renovations) can also be added to the cost base, along with interest and maintenance during the years it was occupied as a main residence.

A concession is available where a property is held for longer than 12 months, allowing for a 50% discount on the capital gain. Only 50% of the gain will be assessable, and this amount should be included in your tax return for the financial year when the sale occurred. By contrast, where a property was first established as a main residence, eg by occupying it immediately after purchase, the cost base will be its market value when first rented out.

The taxable capital gain may be small when the 50% discount is in addition to a rental period, which takes up a portion of the total ownership period.

Need to know

• CGT applies when a lease is still in place after settlement, even if the intention is to occupy the property as your home
• Capital gain is apportioned based on the days the property was a rental as a proportion of the days it was a main residence.
• A 50% discount applies when a property is held for longer than 12 months.

Shukri Barbara

is principal advisor at

Property Tax Specialists