If you start using part or all of your main residence to produce income for the first time after 20 August 1996, a special rule affects the way you calculate your capital gain or capital loss. In this case, you are taken to have acquired the dwelling at its market value at the time you used it to first produce income if all of the following apply:
• You acquired the dwelling on or after 20 September 1985;
• You first used the dwelling to produce income after 20 August 1996;
• When the property is sold you would only get a partial exemption because you used the dwelling to produce assessable income during the period you owned it; and
• You would have been entitled to full exemption if the sale happened to the dwelling immediately before you first used it to produce income.
If all of the above apply, you must work out your capital gain or capital loss using the market value of the dwelling at the time you first used it produce income. You do not have a choice. A similar rule applies if you inherit a dwelling that was the deceased’s main residence and you use it to produce income.
In working out the amount of capital gain or capital loss, the period before the dwelling is first used by you to produce income is not taken into account.
The example below demonstrates how this rule operates.
Erin purchased a home in July 2000 for $280,000. The home was her main residence until she moved into a new home in August 2003. At the same time, she commenced to rent out the old home. At that time, the market value of the old home was $450,000. In April 2010, Erin sold the old home for $496,000. Erin is taken to have acquired the old home for $450,000 in August 2003 and calculates her capital gain to be $46,000. Because Erin is taken to have acquired the old home in August 2003 and has held it for more than 12 months, she can use the discount method to halve her capital gain. This reduces her capital gain from $46,000 to $23,000.
Next month we will continue our focus on CGT and Real Estate.