When you think of capital gains tax (CGT) and residential properties the two most common situations are the family home (tax free) and an investment property (CGT applies on sale).

What is not widely appreciated, however, is that this can be viewed as a spectrum on which lie various other scenarios where the tax treatment can be more complicated. Complications can also arise where people move overseas, so lets assume the taxpayer at all times is an Australian tax resident.

1. The family home becomes an investment property

In this case CGT is payable for the period after you first start renting it out, worked out by assuming that it was acquired for market value at that time, as long as this occurred after 20 August 1996. The 50% CGT discount also applies to the capital gain as long as you hold the property for a further 12 months.

2. The property is rented out and you later use it as your home

This situation is more difficult, as it is necessary to calculate the total capital gain as if it had always been an investment property, and you will then be taxed on the portion before you moved in, calculated pro-rata on a days’ basis. One saving grace is that the 12- month test for applying the CGT discount is measured from the original acquisition date.

3. Properties used as a holiday home or occupied by family members

Many people don’t realise that CGT applies in much the same way as for an investment property, with one significant difference – any “holding costs” such as council and water rates, land tax, property repairs and mortgage interest that have not been claimed as tax-deductible (because the property was not rented) can be added to the CGT cost base, as long as the property was acquired after 20 August 1991.

Finding this out at the time of selling a property can cause great practical difficulties as typically records of such expenses have not been kept, especially going back several years, so ideally you should be aware of the rule and keep records as you go along, otherwise it will be necessary to undertake as much investigation as possible to maximise the cost base.

If the property was rented out for part of the ownership period, then naturally it is only the non-deductible costs relating to the non-rental period that are included in the cost base.

If the property was initially your main residence and you then moved into another property, as you are generally only allowed to have one exempt main residence at a time, typically you would be subject to CGT on a pro-rata basis in a similar way to that described at scenario 2 above. Note that the deemed market value acquisition rule in scenario 1 cannot be used where the property is not used to earn rent.

4. Effect of divorce on selling jointly acquired properties

Often as part of a family law settlement jointly held assets will be allocated to one party or the other, so that you would acquire your spouse’s share of the property. CGT rollover relief applies to such a transfer, so no tax is payable at this point.

You will be treated as having acquired the second portion of the property at the same time and for the cost as applied to your spouse, i.e. in effect you will be treated as having acquired 100% of the property at the original purchase date and as paying all relevant amounts that contribute to the CGT cost base. The same difficulties described in scenario 3 above can arise where the property was used in this way.

In summary, the CGT treatment of selling residential property can be more complicated than many people think, at times involving partial CGT according to the usage of the property for different purposes and with many opportunities to maximise the CGT cost base and minimise the tax payable, with the most common practical hurdle being the ability to locate the required records.

This article was first published in Personal Wealth Adviser, Issue 6.