6 year rule converting an IP to a PPOR and then possibly back again

[Jom]

Hi all

Apologies for asking this question again, as I'm sure it's been answered lots of times, but I can't seem to find the answer...

My scenario:
I currently have 2 IPs with no PPOR. I am renting with a friend (not in either of my places) and a financial advisor has told me that I could be smart about my investments and convert one of my IPs into an PPOR, so that i can take advantage of the 6 year CGT free rule.

This is an opportune time, as the tenant in the property has just moved out.

I have owned the property for 4 years, and it has been tenanted since day one. I have never lived there previously.

I understand that to take advantage of the 6 year rule, I need move into it for a certain period of time. Then at some stage down the track I could move out and then rent it out again, which would thereby allow me to claim the CGT exemption from any gain from then over the next 6 years.

I understand the principal, but want to make sure i do it all legally of course. So I have questions I'm hoping someone can share the answer to?
1) For what period would I be required to live in the house before moving out again?
2) At what point do i need to get a valuation or valuations done? Which presumably i need to do, as down the track i will need to have a figure that the property was worth, above which CGT should not apply (assuming i sell it within 6 years, which i prob will). Baring in mind the place is currently worth probably 60k more than i paid for it...

Any help would be greatly appreciated.

Thanks all
Jom

 

[Terryw]

Good strategy

No minimum time is required by legislation.

see s118-145 ITAA 1997

and

Capital Gains Tax Determination
TD 51W
Capital Gains: What factors are taken into account in determining whether or not a dwelling is a taxpayer's sole or principal residence?
http://law.ato.gov.au/atolaw/view.htm?locid=cgd/td51/nat/ato

When moving into an IP no valuation is needed, the CGT will be worked out on the percentage of time you were living there compared to when it was rented.
s118.185 ITAA 1997

When moving out you would need a valuation normally,
s118.192 ITAA 1997

But you will be still claiming it as your main residence so it won't really matter what it was valued at this time. If you are absent for more than 6 years you would probably require a valuation at the end of the 6 years.

 

[jech]

If you plan to move back to your IP just before every 6 years, is there any point to doing valuations?, if you are exempt from cgt? Or is it just in case

 

[Terryw]

no point if it tax exempt

 

[Rob G.]

If you plan to move back to your IP just before every 6 years, is there any point to doing valuations?, if you are exempt from cgt? Or is it just in case

Valuations are not required at all.

The property was initally an IP, so pro rata by time occupied as a PPOR.

This is also assuming that your details have been perused by a registered tax specialist to ensure Part IVA will not apply to your particular facts.

Cheers,

Rob

 

[devank]

I have owned the property for 4 years, and it has been tenanted since day one. I have never lived there previously.

I think that can be an issue. I believe you have to live in before renting it out! Could be wrong!

 

[Terryw]

Yes, you can't start claiming a termporary absence until you first establish it as your main residence.

 

[Ed Barton]

Yes, you can't start claiming a termporary absence until you first establish it as your main residence.

it is hard to say you were absent when you never occupied.

I suspect the 6 year rule might come under scrutiny if the gov is looking for cash. ie now.

 

[Aaron_C]

it is hard to say you were absent when you never occupied.

I suspect the 6 year rule might come under scrutiny if the gov is looking for cash. ie now.

No that's what the carbon tax is for (for now).

 

[Ed Barton]

No that's what the carbon tax is for (for now).

i think goose is looking for more cuts or tax increases.

 

[lizzie]

I think the OP "got it" that he can't start claiming the exemption until he's moved in/out - so exemption wouldn't be backdated the 4 years.

To "move in" you need to connect the utilities in your name, change address on rates, change address at the electoral commission roll etc ... can't just pop in for a week or so and then pop back out again.

Other than that - there is no time limit.

 

[vbplease]

There could be one downside to this strategy - both IP's have never been your PPOR? and you haven't claimed the FHOG or stamp duty concession?

If you move into one of your IP's now, I'm sure you wouldn't be entitled to the FHOG and SD concession later? Depends what your plans are regarding buying a PPOR in which you may want to convert to an IP, while having CGT free for 6yrs? Could be a $20k saving?

 

[Jom]

I have never lived in this IP previously, but have claimed the FHOG on another property, which I have sold previously.

The purpose of this exercise would be simply to establish it as my place of residence, before temporilily moving out (for up to 6 years), thereby enabling myself to exemption from CGT for this period. I understand that it would cease to be my PPOR as soon as I sold it, or bought a new property which I then could move into the make my PPOR,.

So I understand to enable me to establish this place as my PPOR, that I will need to connect all utilities, change my details with the AEC, and redirect mail etc etc. And then at some stage in the next couple of months "move out".

It sounds as though no valuations will be needed, as I will pro-rata the time as a PPOR as compared to when it was a IP if/when i sell within 6 years time.

So if my understanding is correct... given i have owned it for 4 years now, if i establish it as my PPOR now, and then kept it for another 3 years and then sell. I would pay CGT on the 4 of the 7 years worth of growth. If I bought it hypothetically for 260k and sold it for 400k, i would pay CGT on 4/7ths or 57% of the 140k gain. I would pay CGT on 80k instead of the full 140k if i never converted it to my PPOR.

Or if I sell it in one year for 320k. I would pay cgt on 80% of the 55k gain instead of the 100% if I sold it for the same price now.

Both these equations would also need to deduct buying/selling costs which are also taken into account when making the CGT calculation, as well as the 50% reduction in CGT if owned for over 12 months.

I think i've pretty much got my head around it now...

 

[lizzie]

So if my understanding is correct... given i have owned it for 4 years now, if i establish it as my PPOR now, and then kept it for another 3 years and then sell. I would pay CGT on the 4 of the 7 years worth of growth. If I bought it hypothetically for 260k and sold it for 400k, i would pay CGT on 4/7ths or 57% of the 140k gain. I would pay CGT on 80k instead of the full 140k if i never converted it to my PPOR.
...

don't forget ... if you own the property for longer than 12 months then the CGT is calculated on only 50% of the gain ... so you would then only pay CGT on $40,000