Tax Q&A: Trading loss against gain

Q: I purchased a residential property in Padstow, Sydney, in November 2011 and lived in it until August 2016. I rented the property out from August 2016 to April 2019 before selling it.

This is the only residential property I have owned, as I have lived in a rental property since August 2016. I understand that I am eligible for the main residence exemption as I did not own any other property; however, can I elect not to apply the main residence exemption even if I only owned the single property?

Given that the Padstow residential property valuation in August 2016 (when I first rented out my property) is much higher than the sales price achieved in April 2019, could I include or carry forward a capital loss in my tax return to off set against capital gains?

The reason I ask is because I just sold company shares and made a big capital gain. Using a capital loss from the residential property to off set the capital gain on shares would help reduce my tax liability.

Thank you, Michael

A: Under normal circumstances, from the time you acquired the Padstow property in November 2011 until August 2016, the property would clearly be treated as your main residence. As the property first became available for rent from August 2016, under a ‘special rule’ for capital gains tax you may be deemed to have acquired the property at its market value at that time.

Further, given that you did not acquire another property after you moved out of the Padstow property in August 2016, you have the choice to continue to treat the property as your main residence for up to six years under the ‘temporary absence rule’.

Having said all that, due to your specific situation your question pertains to whether you can “elect not to apply the main residence exemption” because the market value of the property in August 2016 was much higher than the actual sale price of the property in April 2019.

To answer that question, we need to determine if the special rule above requiring a reset of the cost base of your property to its market value at August 2016 would apply in your specific circumstances.

Under the main residence exemption rules, the cost-base reset would only apply if “you would get only a partial exemption” because your property was rented out from August 2016, and this depends on whether the temporary absence rule would apply to your circumstances.

In this regard, as you have the choice to apply the temporary absence rule or otherwise (as distinct from the choice to apply the main residence exemption, which is not discretionary), if you choose to not apply the temporary absence rule, you will only be entitled to a partial main residence exemption as the property was used for incomeproducing purposes for a period during your ownership.

It would follow that the special rule would apply to reset the cost base of your property to its market value at August 2016. As the capital proceeds derived from the sale of the property in April 2019 are significantly less than the modified cost base of the property, it is my view that you would be entitled to claim a capital loss, and this loss can be carried forward on your tax return until such point as you make a capital gain.

The capital loss would essentially be the amount by which the cost base exceeds the capital proceeds on sale. Note that the cost base may be reduced, eg with any cumulative capital works deductions claimed for the period when the property was available for rent.

Need to know

• You can choose whether to apply the temporary absence rule or not.
• Only partial exemption applies if the property has been rented out.
• You can claim a capital loss on the sale of a property.

Eddie Chung

is tax and advisory partner at BDO