Background:
Jacques and Monique, a French couple in their early 40s, migrated to Australia in 2021 in pursuit of new opportunities. They purchased a new family home in Sydney, which became their main residence, and began their life as Australian tax residents.
However, back in France, they still owned a family home they had purchased in 2010 for AUD $1 million. Before leaving France, they obtained a formal valuation for the property — it was worth $1.8 million on the day they left and became Australian residents.
In 2024, due to a downturn in the French property market, they sold that overseas home for $1.5 million — below the 2021 value, but still above their original 2010 purchase price.
Naturally, they were puzzled. Could they really claim a $300,000 capital loss for Australian tax purposes, even though they had made a $500,000 gain overall since 2010?
Seeking clarity, Jacques and Monique reached out to Investax for an expert opinion to ensure the tax treatment of their foreign property sale was correctly handled — and to determine whether they could lawfully claim the capital loss in their 2025 tax return.
Capital Gains Tax and Migration: A Critical Reset Point
Under Australian tax law, particularly Section 855-45 of the Income Tax Assessment Act 1997 (ITAA 1997), the moment Jacques and Monique became Australian tax residents marked a key turning point.
From that date forward, their foreign assets—including the French property—were effectively deemed to have been acquired at their market value on the date they became residents. In other words, for CGT purposes in Australia, the property was considered as “purchased” in 2021 at a value of $1.8 million, regardless of its original 2010 purchase price of $1 million.
This legislative rule provides a fair basis for taxing migrants only on gains accrued after becoming Australian residents, not before.
Therefore, when Jacques and Monique sold the French home in 2024 for $1.5 million, they had—on paper—a capital loss of $300,000. And yes, that loss is recognisable for Australian tax purposes, even though in global terms, they still made a $500,000 gain from the property since 2010.
This might seem like a quirk in the system, but it’s not a loophole—it’s a deliberate feature of the Australian tax regime designed to be fair to new residents.
What About the Main Residence Exemption for the French Home?
Another layer of complexity arises when considering the main residence exemption—which can sometimes apply to foreign properties under Australian law.
The ATO allows the main residence exemption under certain conditions even if the property is located overseas. The key rule here is in Section 118-145 ITAA 1997, often referred to as the six-year absence rule.
If the property was treated as the couple’s main residence upon departure and wasn’t used to produce income immediately, they may have been eligible for an exemption on any future gain. However, in Jacques and Monique’s case, once they left France and started renting out the property, it began generating income. That’s when Section 118-192 kicks in.
This provision—the “first used to produce income” rule—resets the cost base to the market value at the time the property is first rented out. Since this happened around the same time they became Australian residents, both cost base reset rules effectively align.
In practical terms:
- They moved to Australia in 2021 and became residents.
- The property was rented out in 2021.
- The cost base was reset to $1.8 million, regardless of the original purchase price or previous main residence use.
The Mechanics: Why a $300,000 Capital Loss is Claimable
Let’s break it down:
- Original Purchase Price (2010): $1 million
- Value on Migration (2021 – Deemed Cost Base): $1.8 million
- Sale Price (2024): $1.5 million
- Capital Loss (for Australian tax purposes): $1.8m – $1.5m = $300,000 loss
Because CGT only applies from the point of becoming a tax resident, the earlier gain from 2010–2021 is not taxed in Australia.
Instead, only the movement from 2021–2024 is captured. This aligns with Section 855-45, which resets the cost base of foreign assets for new residents to their market value at the date of residency commencement.
This also means that Jacques and Monique can now carry forward the $300,000 capital loss to offset future capital gains from their investments—whether it’s from Australian shares, real estate, or other CGT events.
What Happens to the $300,000 Capital Loss?
In Jacques and Monique’s case, the $300,000 capital loss is real and allowable under Australian tax law — but what if they don’t have any capital gains in the 2024–25 income year to offset it?
That’s exactly the situation they found themselves in. With no other investments sold and no capital gains triggered in the same year, the capital loss couldn’t be applied immediately.
However, under Australian tax law, capital losses can be carried forward indefinitely. This means Jacques and Monique can bank the $300,000 capital loss and use it to offset any future capital gains — whether that’s from selling shares, investment properties, or other capital assets.
Importantly, capital losses can only be used to offset capital gains — they can’t reduce other forms of income such as salary, rental income, or business profits. So, while the loss won’t reduce their 2024–25 tax bill directly, it still has significant long-term value as a future tax shield.
By properly recording the loss in their tax return and retaining the supporting valuation and sale documents, Jacques and Monique have secured a valuable tax asset they can apply strategically in future investment decisions.
Conclusion: Why Expert Guidance and Timely Valuations Matter
Jacques and Monique’s experience highlights how important it is to understand the Australian tax implications of foreign property ownership—especially when migrating. From the start of their journey, Investax Accountants guided them through key steps, including obtaining a valid market valuation at the time they became Australian tax residents. Without this, they may have struggled to justify their cost base to the ATO or missed out on significant tax benefits.
This is where working with a specialist property tax accountant becomes essential. General tax practitioners may not always consider the complexities of foreign asset rules, overseas main residence exemptions, or capital gains tax reset provisions under sections like 855-45 and 118-192 of the ITAA 1997. An experienced adviser will ask the right questions, request the right documentation, and ensure your tax position is protected—both now and in the future.
At Investax, we specialise in helping individuals with foreign property interests navigate these nuanced rules. Whether you’re migrating to Australia, managing overseas assets, or planning to sell property abroad, our team can provide tailored, strategic advice to help you achieve the best possible tax outcomes.
