You have an unusual situation so I checked with the Australian Taxation Office (ATO), whose spokesman replied, referring to your husband’s share of the house: “Where land was purchased prior to the commencement of CGT with improvements occurring post-CGT commencement, a large part of the value of the asset will be considered pre-CGT.”
Unfortunately, it is a bit ambiguous and you would need to get a private ATO ruling (they are free) to see what portion of your husband’s half of the house would remain CGT-exempt.
Your half of the house, which you received in 2020, would be deemed as a post-1985 asset and subject to CGT once it ceases to be your main residence.
When you move out of your home and rent it, you must use market value at that time as your cost base. In other words, get a valuation when you move.
Theoretically, you can rent a home for up to six years and retain its CGT-exemption – but only if you claim no other home as you main residence, which would mean your new home would not then be CGT-exempt, so you would need to choose. If you feel you may move back, then rent out your current home.
You would need to decide which property to sell to pay off the mortgage and are likely to save on tax if you sell in a year in which you have not worked, but that depends on the capital gain achieved.
Don’t forget that if you sell your current home after age 65, having owned it for more than 10 years, you can each make a $300,000 downsizer contribution into super.
My husband and I are aged 60 and 59, respectively, and plan to work for at least another two years before I retire and my husband cuts down to two days a week. We own a house worth $3.5 million with a mortgage of $700,000 and do not have any other investments. Our total superannuation amounts to $1.1 million and we will likely be receiving an inheritance of about $400,000-$500,000. My question is, when we receive this inheritance, is it wiser to pay off the mortgage to reduce debt, or put $300,000 into super and the remainder towards the home loan, or purchase an investment property? L.P.
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I have always argued that two main financial goals during a working lifetime should be to retire with a fully paid off home, so that mortgage payments do not cut into your income and you have enough money to meet your needs through retirement.
Although you do not mention how much you earn or spend, the fact that you own a $3.5 million home implies you are in a high-income, high-spending bracket. So, I suspect you would not be able to meet either of those goals within two years.
Taking out more loans to buy another mortgaged property does not make sense at this time of your life and, while you might earn more by placing the inheritance into a super fund rather than your mortgage, current high share valuations mean there is a risk of a post-pandemic market tumble.
The lowest-risk approach would be to put the money into your mortgage and consider working a few more years to build up your super.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Australian Financial Complaints Authority, 1800 931 678; Centrelink pensions 13 23 00. All letters answered.
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