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What happens to the main residence exemption upon divorce or death?
Main Residence Exemption Upon Divorce or Death
The main residence exemption upon divorce or death can get tricky. How exactly does the exemption apply when owners divorce or die?
In search of an answer we asked Andrew Henshaw of Velocity Legal in Sydney.
Here is what we learned but please listen in as Andrew Henshaw of Velocity Legal explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
A – Divorce
All was fine until the day one of you moved out. Well – not really – but it was with respect to your main residence exemption.
Family Home
You owned the original family home as an individual – whether jointly or as joint tenants doesn’t matter – and lived in it. So you ticked all the boxes for section 118-110 ITAA 97 to apply. The main residence exemption was all yours, meaning that any capital gain was exempt from capital gains tax.
When one of you moves out, the family home can still receive the full main residence exemption. The indefinite absence rule applies as long as both of you are Australian residents for tax purposes at the time of sale.
But the exemption can only ever apply to one dwelling. So if the one who moved out buys a new property, only one property – the original family home or the new property – can receive the exemption.
Investment Property
It gets a lot more tricky, when one of you receives an investment property as part of the divorce settlement.
Generally a CGT exemption applies where transfers occur due to a relationship breakdown.
And since this is now your new main residence, you would assume that the property receives the full main residence exemption.
But this can become a CGT trap, where an investment property owned by one spouse is transferred to the other spouse for use as main residence. The receiving spouse “inherits” the previous use of the property, so will only ever qualify for a partial exemption.
Foreign Resident
And things still get more tricky when one of you is a foreign resident at the time of sale. It might be years after the divorce settlement, but if one of you is a foreign resident at the time of sale, the main residence exemption might no longer apply to the full capital gain.
A – Death
If the property is pre-CGT and you receive it as a beneficiary, your cost base will be the market value at the time of death. So you don’t pay any CGT on the capital gain from acquisition to death. But you might pay CGT on the capital gain from death until date of sale, although the main residence exemption might apply if you lived in the property while the legal owner.
If the property is post-CGT, you inherit the original cost base of the deceased. So when you come to sell, the entire capital gain – right from the start – is subject to CGT unless you qualify for the main residence exemption.
There is a two-year grace period though. If you sell within two years – no CGT.
So when you inherit a property, either sell within two years or live in it as your main residence or pay the CGT on the full capital gain.
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So this is a short summary of what we learned in this episode. But please listen in as Andrew Henshaw explains all this in a lot more detail.
MORE
Main Residence Exemption for Foreign Residents
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 08 March 2021
Tax Talks spoke to Andrew Henshaw - Director at Velocity Legal - for more details.
