6 year rule
- Thread starter jan
- Start date
Jan
No, unfortunately that's not the way it works. If you have a house which has always been your PPOR and you rent it out and come back to live in it within 6 years, then there is no CGT liability - as long as you don't purchase another PPOR in that time. That is a very simplified explanation.
In your case, the property has been an IP and will always be subject to CGT. If you live in it after retirement, then the tax liability will be determined by the proportion of time it has been an IP. For example, if you have owned an IP for 2 years then turn it into your PPOR for the next 8 years and then sell the property, CGT will be payable on 2/10 of 50% of the capital gain. This is because you have owned it for a total of 10 years and it was an IP for 2 years, with the 50% being the applicable discount because you have owned it for longer than 12 months. Again, a very simplified explanation.
If you are contemplating this course of action, may I suggest that you seek advice from a property-savvy accountant.
Cheers
LynnH
No, unfortunately that's not the way it works. If you have a house which has always been your PPOR and you rent it out and come back to live in it within 6 years, then there is no CGT liability - as long as you don't purchase another PPOR in that time. That is a very simplified explanation.
In your case, the property has been an IP and will always be subject to CGT. If you live in it after retirement, then the tax liability will be determined by the proportion of time it has been an IP. For example, if you have owned an IP for 2 years then turn it into your PPOR for the next 8 years and then sell the property, CGT will be payable on 2/10 of 50% of the capital gain. This is because you have owned it for a total of 10 years and it was an IP for 2 years, with the 50% being the applicable discount because you have owned it for longer than 12 months. Again, a very simplified explanation.
If you are contemplating this course of action, may I suggest that you seek advice from a property-savvy accountant.
Cheers
LynnH
Hi there,
i am in a different position .
We bought our PPOR in 1998 for $92000.
Lived in the property to 2003 and then we have had it rented since.
Just before moved out in 2003 it was valued at $230000
Present value 2007 is $280000
We have bought another PPOR over 6 months ago and are contemplating selling our previous PPOR.
Would CGT be only payable on the time it was rented from 03 to 07.
Would it be only payable in the difference between $230000 and $280000.?
thanks.
i am in a different position .
We bought our PPOR in 1998 for $92000.
Lived in the property to 2003 and then we have had it rented since.
Just before moved out in 2003 it was valued at $230000
Present value 2007 is $280000
We have bought another PPOR over 6 months ago and are contemplating selling our previous PPOR.
Would CGT be only payable on the time it was rented from 03 to 07.
Would it be only payable in the difference between $230000 and $280000.?
thanks.
G'day Flash1,
Regards,
As a layman, I would think that the previous PPOR REMAINED your PPOR until you purchased this new one (six months ago). As such, the CGT payable on the old PPOR could be significantly reduced accordingly. But then, I am NOT an Accountant. But, hey, check with yours - you may get a pleasant surprise,
Regards,
You would not pay any CGT on Property 1 if it remained your PPOR up until the sale date. Property 2 will have 6months of pro-rated CGT to pay if you ever sell it in the future as it won't become your PPOR until Property 1 is sold. Keep the tax in your pocket now and pay it later if you ever sell Property 2.
Hi all - I would like to confirm how this rule applies in my situation.
I bought my PPOR in 2002 and lived in it for 1yr 2mths. I then moved into rental accommodation and have rented out my PPOR ever since (about 4yrs 7mths).
I am now thinking about selling my PPOR, so will I be exempt from CGT based on this 6 year rule? Do I have to move back into the property for the rule to apply or can I sell it with tenants still there?
Thanks.
I bought my PPOR in 2002 and lived in it for 1yr 2mths. I then moved into rental accommodation and have rented out my PPOR ever since (about 4yrs 7mths).
I am now thinking about selling my PPOR, so will I be exempt from CGT based on this 6 year rule? Do I have to move back into the property for the rule to apply or can I sell it with tenants still there?
Thanks.
As far as I can tell, that seems to be one of the dodgy loopholes available.
Your depreciation reduces your cost base, therefore increasing your capital gain. Your taxable capital gain is zero due to the main residence exemption, therefore it is a possible double-dip (I havent heard that the ATO has specifically disallowed this, although could well be wrong)
Hey thanks for your info. I have scoured the ATO site and can't find anything about depreciating a main residence while renting it out. I went through the CGT tool at http://tinyurl.com/24b5zy and it said I will be exempt (there were no questions about depreciation).
CGT and depreciation have been around for a while now, and I would assume this situation is not rare. If it is a loophole wouldn't it have been plugged by now?
Actually I just found this on the ATO site at http://tinyurl.com/258xwq
Claiming deductions
As with any rental property, the costs you incur when your home is rented out, such as repairs and maintenance, are deductible even though you are claiming the main residence CGT exemption.
You need to keep accurate records and remember, you cannot claim:
* an immediate deduction for initial repairs, renovation or construction costs (although capital works deductions may be available over 25 or 40 years for certain construction expenditure), or
* any deductions for periods the home is not rented out or not available for rent.
To me this says they recognise depreciation as a legit deduction (for main residence exemption) - or have I misunderstood it?
CGT and depreciation have been around for a while now, and I would assume this situation is not rare. If it is a loophole wouldn't it have been plugged by now?
Actually I just found this on the ATO site at http://tinyurl.com/258xwq
Claiming deductions
As with any rental property, the costs you incur when your home is rented out, such as repairs and maintenance, are deductible even though you are claiming the main residence CGT exemption.
You need to keep accurate records and remember, you cannot claim:
* an immediate deduction for initial repairs, renovation or construction costs (although capital works deductions may be available over 25 or 40 years for certain construction expenditure), or
* any deductions for periods the home is not rented out or not available for rent.
To me this says they recognise depreciation as a legit deduction (for main residence exemption) - or have I misunderstood it?
Hi James or julia,
Here is an interesting scenario which I am very interested to see your response.
Scenario 1
An Australian citizen is a a permanent resident living overseas.
The person returns to Oz, to live in the new PPR for 1 week then returns overseas.
The property is then rented for the next 5 years. The property is then sold as a PPR.
No Capital Gains tax would be paid.
scenario 2
Same as above , but the intention is to build an IP.
At some point the intention changes and the property will be an IP.
Is it ok to deduct particular expenses with holding /purchasing land/construction etc up until the persons intention changes?
You can move out of your PPoR and rent it for up to 6 years before it becomes liable for cgt.
If the second house, which is to become your new PPoR, was rented from the time you bought it, it will be liable for cgt from day 1, but is calculated on the time it was rented until you move in and use it as the PPoR.
Hi redsquash,
My name doesn't start with J but I'm in love with tax just as much so I thought I would help with your question.
In scenario 1, the week that you lived in the residence would not be enough to claim it as your PPOR. The ATO doesn't require a minimum time to be living in the dwelling but it does want a real intention in occupying the dwelling rather than occupying for the intention of a tax break.
Can you elaborate on scenario 2 please as it seems contradictory?
HI pat,
I am greatful for your input.
scenario 1
I think if there is no minimum requirement then the fact that a tax break occurs in the process is bad luck for the tax office, or to put it in more legalistic jargon , incidental to the events.
How would your answer differ if I did the exact same thing for 2 weeks, 4 weeks, 10 weeks or 25 weeks
Now I recall somewhere that if the purpose of doing something is to reduce your tax then it can be disallowed. I haven't expressed myself clearly but I think you know what I am referring to. Perhaps you could express it better.
However didn't Kerry Packer say he didn't want to pay 1 cent more tax than was necessary. This is my philosophy , as well.
I do not have a PPR so I want to have a PPR when overseas. The circumstances will be as I described.
I will seek a private ruling , but I have never done this so If you have some guidance ............... I also need to make sure I ask the right questions.
scenario 2
I will answer by example.
I buy some land with the intention of building a house.
Various expenses , mortgage interest etc are claimable.
Over the year that it takes from land purchase to final finishing of construction i get a job offer very close to the Ip.
Perhaps the house is 90 or 100 percent complete when this job offer arrives.
I now decide that instead of renting as an IP, I will move to and live in the new property as my PPR. ie my intention has definitely changed from investor to home owner.
Prior to my intention changing I had a number of legitimate expenses incurred with the investment.that are tax deductible in the year they occurred. I will claim these.
I cannot claim any deductions for expenses occurred after my intention changes.
I don't see a problem.Do you?
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