• Treatment of real estate

    If a dwelling (or an interest in a dwelling) is transferred to you under the marriage or relationship breakdown rollover, your eligibility for the main residence exemption from capital gains tax (CGT) generally takes into account the way in which both of you used the dwelling during your combined period of ownership.

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    Transfers from your spouse on or before 12 December 2006

    If a dwelling (or an interest in a dwelling) acquired by your spouse on or after 20 September 1985 was transferred to you under a CGT event that happened on or before 12 December 2006, and the marriage or relationship breakdown rollover applies, you're entitled to an exemption from CGT (when you dispose of it) for the period it was your main residence after it was transferred to you.

    You may only qualify for a partial exemption if:

    • it was your main residence for only part of the period after it was transferred to you
    • you used it to produce assessable income
    • the land on which the dwelling is situated is more than two hectares.

    Keep all relevant records – make sure you get any records you need from your spouse if you don’t already have a copy.

    See also:

    Transfers from your spouse after 12 December 2006

    If an ownership interest in a dwelling acquired by your spouse on or after 20 September 1985 is transferred to you under a CGT event that happens after 12 December 2006, and the marriage or relationship breakdown rollover applies, you take into account the way in which each of you used the dwelling during your respective periods of ownership when determining your eligibility for the main residence exemption on that interest.

    This means you're entitled to a full exemption from CGT (when you dispose of the dwelling) if the land on which the dwelling is situated is two hectares or less, and:

    • during the period your spouse owned the dwelling, it was their main residence and was not being used by them to produce assessable income
    • during the period you owned the dwelling it was your main residence and was not being used by you to produce assessable income.

    If any of these conditions are not met, you may qualify for a partial exemption.

    To work out any partial main residence exemption you calculate your capital gain or loss using the formula:

    Add the 'Number of days the dwelling was not your spouse's main residence during their ownership of the transferred interest' and the 'Number of days the dwelling was not your main residence during your ownership of the transferred interest'. Divide the total by the 'Number of days in your combined ownership period for the transferred interest', and multiply by the 'Capital gain or loss on the transferred interest'.

    The marriage or relationship breakdown rollover applies only to a transferred ownership interest. If you own an interest that was not transferred – for example, because you had joint ownership of the dwelling prior to the breakdown – you treat that interest under the usual rules for determining the main residence exemption.

    Keep all relevant records – make sure you get any records you need from your spouse if you don’t already have a copy.

    See also:

    Example: Dwelling transferred to you under a CGT event that happened after 12 December 2006 becomes your home

    George and Natalie jointly bought a holiday house on 0.1 hectares of land. Settlement of the purchase contract happened on 13 March 2012. On 13 March 2014, George transferred his half interest to Natalie under the terms of an arbitral award.

    Natalie used the dwelling as her main residence for three years from the date of the CGT event until she sold it. Settlement of the sale contract happened on 13 March 2017. The sale price was $600,000.

    Natalie's original half interest

    The capital gain on Natalie's original half interest is $100,000 ($200,000 x 50%). Because the dwelling was Natalie’s main residence for three years out of the five years she owned her original half interest, she's entitled to a partial exemption on that interest under the usual formula for a main residence exemption:

    "Divide the 'Number of days in your ownership period when the dwelling  was not your main residence' by the 'Total number of days in your ownership period', Multiply the result by the 'Capital gain or loss'."

     That is:

    $100,000 × (730 ÷ 1825) = $40,000

    Transferred interest

    The marriage or relationship breakdown rollover applies only to the half interest transferred from George to Natalie.

    The capital gain on this interest is $100,000 ($200,000 x 50%). In calculating her entitlement to the main residence exemption, Natalie must consider how she and George used that interest during their respective periods of ownership:

     Add the 'Number of days the dwelling was not your spouse's main residence during their ownership of the transferred interest' and the 'Number of days the dwelling was not your main residence during your ownership of the transferred interest'. Divide the total by the 'Number of days in your combined ownership period for the transferred interest', and multiply by the 'Capital gain or loss on the transferred interest'.

    That is:

    730 (George) + 0 (Natalie) ÷ 1825 (combined period) = 0.4

    $100,000 × 0.4 = $40,000

    Natalie's total assessable capital gain for her original interest and the transferred interest is $80,000 ($40,000 + $40,000).

    The above calculations do not take into account any additions to the cost base. In working out the cost base of the interest George transferred to her, Natalie adds any relevant costs she incurred after George transferred it to her to the cost base of his interest at the time of the transfer.

    End of example

    The ‘home first used to produce income’ rule

    If a dwelling is used as a main residence from the time it's acquired and is later used to produce income sometime after 20 August 1996 (such as renting it out), the home first used to produce income rule may apply.

    This means the owner is taken to have acquired the dwelling at its market value at the time it was first used to produce income.

    If the dwelling (or an interest in the dwelling) is transferred to you under a CGT event that happens after 12 December 2006, and the CGT marriage or relationship breakdown rollover applies to the transfer, you're taken to have acquired it at the time it was first used to produce income for its market value at that time. The first income-producing use may be during your or your spouse’s ownership period.

    Example: Transfer after 12 December 2006 and ‘home first used to produce income’ rule applies

    Harry bought a house for $200,000 on 17 November 1999. It was his main residence and was not used by him to produce income.

    On 1 June 2012, he and Anita started living together as husband and wife. Harry moved into Anita’s townhouse and rented out his house. It was valued at $365,000 at the time.

    Harry and Anita's relationship broke down in 2016. Harry gave notice to the tenants that the lease on the house wouldn't be renewed.

    On 1 June 2017, Anita moved into the house. Under a binding agreement entered into on the same day, Harry transferred the house to Anita. The CGT rollover applies. (Anita also transferred her townhouse to Harry under the agreement).

    Anita is taken to have acquired the house on 1 June 2012 for the market value at that time ($365,000) because:

    • Harry acquired the house after 19 September 1985
    • it was Harry's main residence from the time he became the owner
    • the house was first rented out after 20 August 1996
    • the CGT event under which the house was transferred to Anita happened after 12 December 2006 and CGT rollover applied
    • Anita would be entitled to a part main residence exemption on the sale of the house
    • Harry would have obtained a full main residence exemption had he sold it just before he began renting it out on 1 June 2012.

    If Anita sells the house under a contract that is settled on 1 June 2022 and it is her main residence until that time, she would obtain a 50% exemption – because it would have been her main residence for five years (1 June 2017 to 1 June 2022) out of the 10 years after she is taken to have acquired it.

    End of example

    Choices made under the CGT main residence rules

    In certain circumstances you can choose to treat a dwelling as your main residence for a period even though you no longer live in it or you are yet to live in it.

    Such choices are not required to be made by a transferor spouse where rollover applies, because the capital gain or loss is disregarded. However, there is nothing to prevent the transferor spouse making a choice – for example, as part of the negotiations with the transferee spouse about the transfer of a dwelling.

    If there was a period when the transferor spouse and transferee spouse had different main residences before they separated, they need to choose to:

    • treat one of the dwellings as the main residence of both of them for the period, or
    • nominate the different dwellings as their main residences (and obtain a part exemption on both).

    See also:

    Choices relating to the main residence exemption generally need to be made by the day the person lodges their tax return for the income year they transfer or enter into the contract to sell the dwelling (or their interest in it) or another CGT event happens to it. In most cases, the way in which the tax return is prepared is sufficient evidence of that choice.

    For the practical purpose of negotiating a property settlement, any choices the transferor spouse decides to make would generally be expected to be made before they transfer the dwelling (or their interest in it) to the transferee spouse.

    A signed statement could be provided by the transferor spouse to the transferee spouse at the time of the property settlement as evidence of making a choice. The transferee spouse could use such a statement to support the calculation of any capital gain or loss they make when the dwelling is later disposed of or another CGT event happens to the dwelling.

    Where appropriate we can allow further time for a choice to be made after the time it is normally required.

    Once a choice is made, it is binding and can't be changed.

    Example: Choice made by transferor spouse to treat dwelling as their main residence

    Denise bought a townhouse under a contract that settled on 1 August 1998. She lived in it for three years.

    On 14 August 2001, Denise and Calvin rented a flat and started living together as husband and wife. At that time, Denise began renting out her townhouse. After living together for two years in the flat, Denise and Calvin bought a house. They moved in on 25 September 2003, the date of settlement of the purchase contract.

    Denise continued to rent out the townhouse.

    In 2017, their relationship broke down.

    Denise and Calvin decided that Calvin would transfer his half share in the house to Denise (where she would continue to live) and she would transfer the townhouse to Calvin (for him to live in) under a binding financial agreement.

    Because the townhouse had been Denise’s main residence, she could choose to continue to treat it as such for up to six years after moving out.

    In negotiating their binding financial agreement, Denise provided Calvin with a signed statement that she had chosen to treat the townhouse as her main residence for the two years between the time she moved out and the time they bought the house together.

    Because the ‘home first used to produce income’ rule applies, Calvin is taken to have acquired the townhouse for its market value on 14 August 2001 and will qualify for a partial main residence exemption when he sells it (the period from 1998 to 2001 is ignored from their combined period of ownership).

    The effect of Denise’s choice is that the townhouse is exempt from CGT for the period between 14 August 2001 (when she moved out) and 25 September 2003 (when she and Calvin bought the house together). So when Calvin sells it, he will get an exemption for that period as well as the period he lived in it after the marriage broke down.

    If Denise had not made the choice, Calvin would not get the exemption for the period from 14 August 2001 to 25 September 2003.

    End of example

    Dwellings transferred from a company or trust

    If a dwelling (or an interest in a dwelling) is transferred to you from a company or the trustee of a trust, and the marriage or relationship breakdown rollover applies to the transfer, you're treated as having owned the dwelling while it was owned by the company or trustee. However, you can't get the main residence exemption during any part of the period the company or trustee owned it (even if you lived in the dwelling during that time).

    Therefore, if a dwelling is transferred to you by a company or trustee as a result of your marriage or relationship breakdown, you'll be entitled to the exemption only for the period after it was transferred when it was your main residence. You work out the proportion of your capital gain or loss that is exempt by dividing the period after the transfer that it was your main residence by the combined period you and the company or trustee owned it.

    See also:

    Last modified: 17 Jul 2017QC 52262