6 Year rule Question.

[type_one]

I know there is a lot floating around on the 6 year rule but to me its all very generic. Wondering what peoples opinion on this scenario are.

Bought a house and moved in as PPOR. 6 month later moved out and rented it. haven't bought a new house. renting myself. met someone else who has a PPOR but has since moved out and now rents with me. we will claim my property as PPOR under the six year rule as it has a bigger gain. She had only owned her for about 18 months.

My question is we are looking at buying a house together. Once we do so that will become our PPOR. Hence we stop claiming it on my other property. I haven't been out of my property 6 years yet and we really don't want to sell it.

When we do sell it one day, do we just claim the PPOR all the way up to when we bought our new house together and simply divide by years of ownership in total, apportioning PPOR years and non PPOR years?

Or my preferred option, if legal, is to get my old PPOR, now investment property professionally valued at the same time we buy our new PPOR together, i.e. when the PPOR swaps houses. And this become the new cost base when we sell and we would happily pay the CGT on the gain from that reset value.

My reason for this is I have a fair sizeable gain up to this point and seems crazy to divide that by non PPOR years at this point. I might actually be better sell it now if i can't.

For example. (not real figures)
Bought for $100k 2000
Valued at $500k 2014 new PPOR bought and status lost.
Sell $550k 2017.

If it was just based on divided years $550k - $100K = $450k gain.
divided by years as investment 3 Years $450/17 *3 =$79K CGT.

Or using reset value $550k-$500k = $50K CGT

Can you even divide by years once you go over 6 years or do you then have to pay the gain on the whole time from purchase..

Can you even reset the value?

Thought? any links to precedents that show this. i have researched but finding it hard to find this. Might have to call the ATO.

 

[Paul@PFI]

I know there is a lot floating around on the 6 year rule but to me its all very generic. Wondering what peoples opinion on this scenario are.....

Or my preferred option, if legal, is to get my old PPOR, now investment property professionally valued at the same time we buy our new PPOR together, i.e. when the PPOR swaps houses. And this become the new cost base when we sell and we would happily pay the CGT on the gain from that reset value.

No...That is not an option. You own a CGT asset which was your main residence. The MR exemption continues under one of two methods:
1. You actually do not have another main residence; or
2. If you do have another property which could be a MR, you "elect" for the original to remain your MR. (that property can be owned by you or your partner)

Apportionment and/or exemption are your options. The election for which property will be the MR will be made in the manner you prepare and lodge tax returns to include cap gains etc.

I recommend you seek personal advice specific to your circumstances prior to selling as you may have some capital costs which affect the cost base in the first six months + in the later period + QS report deductions ? The capital gains tax may be far less than you expect.

You also have a potential land tax issue that you should check. OSR are good at matching up partners and their respective props. (They have a different approach and require you to actually live in each property BUT a couple cant live in both !. One or both would fall within the land tax system. I usually recommend you register even if well below the thresholds.

Can you even divide by years once you go over 6 years or do you then have to pay the gain on the whole time from purchase..
No..The whole gain is apportioned. The six years is the maximum exempt period if you are eligible. Then the 50% CGT discount is applied. Of course the cost base may be increased by ownership costs you never claimed deductions for and improvts etc. It may also be reduced by QS deductions.

Can you even reset the value? No. If you are NOT eligible for the 6 yr exemption then a different rule may apply which allows a former MR to have its cost base reset at the MV of when it FIRST earned income. That was 6mths after acquisition ?? Likelyy to be same as cost perhaps ??

Have you considered selling part X% (1% - 99%) to your partner ?? This may trigger X% of the CGT but defers 50% and allows a refreshed cost base for 50% and revised deductions ???

 

[type_one]

Thanks for the reply. All seems like good advice. I wouldn't be interested in selling down x% of it.

Can I clarify though that once the six year runs out I then have to pay CGT from the date of purchase or the reset value from when it first became an investment property within that six years?

It would seem to me that if I did get a big increase in value from when I moved out and wasn?t planning on keeping it forever, it might be worth selling before the 6 years runs out. Let?s just say the increase in value was $300K. Why would you sell in year 7 and have to pay CGT on the whole $300k across 7 years. Of course it may have gone up slightly in value but most of the increase in theory was in tax free 6 year rule years. I do take you r point about the CGT may not be as high as first thought though.

If I did decide to keep it would it be a better idea to sell it to my partner at the market value within the 6years and get the gain tax free. Thus resetting the base value in her name. Of course Stamp duty, LMI etc considerations would need to be calculated. It would have the benefit of realising equity and increasing the tax deductible interest. Though it would mean going from positive to negative so maybe nto a good idea. Might have to just sit down and do the maths on it.

 

[Paul@PFI]

Thanks for the reply. All seems like good advice. I wouldn't be interested in selling down x% of it.

Can I clarify though that once the six year runs out I then have to pay CGT from the date of purchase or the reset value from when it first became an investment property within that six years? It is apportioned with a MAXIMUM 6yrs exemption. The valuation method is not available if it remains exempt !

It would seem to me that if I did get a big increase in value from when I moved out and wasn?t planning on keeping it forever, it might be worth selling before the 6 years runs out. Let?s just say the increase in value was $300K. Why would you sell in year 7 and have to pay CGT on the whole $300k across 7 years. You dont Of course it may have gone up slightly in value but most of the increase in theory was in tax free 6 year rule years. I do take you r point about the CGT may not be as high as first thought though.

If I did decide to keep it would it be a better idea to sell it to my partner at the market value within the 6years and get the gain tax free. Maybe but the market value MUST be used and its a stamp duty trigger and a CGT trigger !!. Might cost $$ but yes it can reset cost base. Thus resetting the base value in her name. Of course Stamp duty, LMI etc considerations would need to be calculated. It would have the benefit of realising equity and increasing the tax deductible interest. Though it would mean going from positive to negative so maybe nto a good idea. Might have to just sit down and do the maths on it.

That's right. Its a constantly moving set of goal posts. The issues are really not that complex however
1. Ascertain the MR exempt period eg 6 yr
2. Maximise the exempt period ie 6yr.
3. In 7 years if 1/7th is taxable and eligible for 50% CGT discount then the tax may be far less than you think. ie for each $100k profit only $7142 will be taxable at say max 49% = $3500...So a 3.5% tax impact. Joint owners may be less.

 

[Rob G.]

Not simple.

Seems that cost base is market value when you first rented (6 months after purchase).

If 'met someone else' means in a domestic relationship (spouse/de facto) and they also have a house that could be treated as a main residence then one or both of you will be foregoing some main residence exemption in respect of your houses in spite of any 6 year absence concession.

You need to give detailed dates etc. to an adviser.