Liza and Phil are about to start a family. They have a house they purchased in 2015 for $550,000; similar houses on their street are selling for $900,000, and they still owe $390,000. A similar house on their street is being rented out for $750 a week. Lizs mother, Betty, has died, leaving them her house. Betty acquired her house in August 1990 for $95,000 and, on her date of death, 1 February this year, it was valued at $1.2 million. An architect quoted that the renovations needed to make Bettys house suitable for a young family would total $325,000 as the house had not been renovated since Betty first moved in. A real estate agent advises that, without the renovation, the house could be rented for $800 a week.

Required

Liz and Phil ask your advice as to which is the best house for them to sell, including advice as to how the CGT exemptions might apply and any limits on them.

Please give references to relevant sections of legislation, cases and rulings to support your answers.