Managing Multiple Principal Place of Residence for Capital Gains Tax Purposes:
Background: Our client purchased their first residence, immediately making it their primary place of residence. Subsequently, they moved out and rented this property for a period exceeding six years. During this time, the client acquired a second residence, in which they continued to reside. This case study explores whether the client can continue to consider the first property as their principal place of residence during the six years after vacating it, and if so, what the cost base for Capital Gains Tax (CGT) purposes should be for the first residence.
Client’s Inquiry: The client was uncertain about the CGT implications of their situation and sought clarity on two specific questions:
- Can they continue to treat their first residence as their principal place of residence for up to six years after moving out, despite having acquired and lived in their second residence during this time?
- In the event they can continue to treat the first residence as their main residence, should the cost base for CGT purposes be determined based on the market value at the time they ceased living in the property or at the end of the six-year period?
Investax Tax Specialists’ Response: Investax’s Tax Specialists provided the following guidance:
- Continuing Principal Place of Residence: According to Section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997), the client can choose to maintain their first property as their principal place of residence for CGT purposes, even after moving out and residing in their second property. They have a window of up to six years to make this choice.
- Cost Base Determination: As per the ‘home first used to produce income’ rule outlined in Section 118-192 of the ITAA 1997, the cost base for CGT purposes for the first property is established as the market value at the time it became available for rent. This means that the market value of the property at the point when the client decided to rent it out is the reference point for CGT calculations.
Conclusion: In this case, our client can elect to maintain their first property as their principal place of residence for CGT purposes, even while residing in their second property, for a period of up to six years after moving out. Additionally, the cost base for CGT calculations for the first property is determined based on its market value at the time it was made available for rent, as per the ‘home first used to produce income’ rule. It is crucial for taxpayers to understand the CGT implications of their property decisions and seek professional advice to make informed choices in managing their assets.