Accountant says dont need to do anything...not sure if he's right?

If a property is used as an IP first, then a PPOR, capital gains are assessed on the increase in value in proportion to the time used for each purpose. Any money spent on repairs while it is an IP have been claimed on tax, so if a valuation was used it would amount to "double dipping" in that claimed repairs and depreciated fittings would be added to the value of the property to raise the cost base.

I guess the reason for using a valuation if the PPOR becomes an IP is that people's intentions change, and over time a lot of improvements may have been done so that the exact cost base is impossible to establish unless every cent spent has been documented, which simply doesn't happen.
Marg
 
Damn! we have done heaps of improvements on our IP turned PPOR since we moved in, which have significantly added to the value!! I thought it would be ok but it sounds like the method used will spread that value over the life of our ownership and we'll be paying more CGT than we would have if we'd left it unimproved.

So can we claim the cost of these improvements to offset the increased CGT we'll be paying? If not, double damn as we could have claimed them if we'd done them when it was an IP.

Oh well, lesson learned. Time to move, methinks.
 
Damn! we have done heaps of improvements on our IP turned PPOR since we moved in, which have significantly added to the value!! I thought it would be ok but it sounds like the method used will spread that value over the life of our ownership and we'll be paying more CGT than we would have if we'd left it unimproved.

So can we claim the cost of these improvements to offset the increased CGT we'll be paying? If not, double damn as we could have claimed them if we'd done them when it was an IP.

Oh well, lesson learned. Time to move, methinks.

It not all good news if you massively improve your initial PPOR before converting to an IP unless you can use the 6 year absence rule.

If your 6 years expires ...

... sure you get the cost base increased to market value and also interest deductions on the money used for the improvements while renting ...

... but somebody else gets to enjoy the improvements and the increased building depreciation deductions claimable over time come back off the cost base again !

Cheers,

Rob
 
Yeah Rob but this place started off as an IP. We later moved in and it is our PPOR. We have done the improvements since we moved in and it has jumped in value by about $100k in the 3 years we've been living in it. In the 3 years prior to that when it was an IP, the value only grew $50k.

I had thought (like OP) that we would pay CGT on the $50k increase in value whilst it was an IP. But it sounds like we'll have to pay CGT on $150k (total increase since purchase) / 6 (total years held) * 3 (total years used as IP) = $75k. Am I interpreting that right? If so that sucks!!

It never started off as our PPOR so the six year exemption doesn't apply
 
It would work out even worse if the market continued upwards at a fast rate.. If it went up another $50k in the next year then our CGT will be $200k /7 *3 = nearly 86k !! OMG why didn't our accountant tell us about this!? The longer we stay the more the ATO get their grubby hands on.

Can you ask for a private ruling on this? If I'm interpreting correctly, it's rediculous.
 
Can you ask for a private ruling on this?
I appreciate your frustration, but seriously, do you mean that you want your gains to be calculated differently to everybody else's? On what basis? Because you didn't realise what the rules were and don't want to pay that much tax? :p I don't think that's going to fly, sorry. :eek: But good luck!

Thanks, marg4000, for explaining the logic. The bit about "not having records for improvements to a PPOR because you don't know that it might ever be an IP" makes sense and is the first good reason I've heard for the differing calculation methods. Basically the default method is to split by time, except where circumstances mean that using this method would be inequitable/impractical (such as when somebody didn't know their PPOR would ever be an IP). Got it! (Finally. ;))
 
hmmm, thats what i originally thought hence why i thought Accountant was wrong...

i think i'll just go ahead and get a valuation.

no intentions of ever selling this house but won't be in it for more than 3yrs probably....then it'll revert back to an IP....

do i want this val upon making this home our PPOR to be as high as possible...and then upon reverting it back to an IP get a val and try and get it valued as low as possible so the CG is minimal??

A valuation won't do you any good. The capital gain (if you sell) will be the total gain multiplied by the percentage of time it was used as an IP.

Say your gain is $200,000, you owned the property for 20 years, and rented it out for 4 years.

Your capital gain for tax purposes would be 200,000 x (4/20) = $40,000.

As MArg has sai, a valuyation is only needed when you are changing the status from PPOR to IP.
 
It seems a bit odd to me.
I would've thought that if you wanted to claim CGT exemption for the period it was your PPOR, you would need to establish it's value when you took up residence, and again when you vacated.
If you are willing to forego this exemption, then go right ahead.:eek:

No, that's not right. Your capital gain is discounted for the time it was your PPOR. If it was your PPOR for 40% of the ownership period, and an IP for 60%, then tax is payable for 60% of your capital gain.

The valuation method is only used in specific circumstances, such as changing status from PPOR to IP.
 
While its all there in writing, I cant say i agree with it.

What about the situation where people buy a property that is currently leased and allow the tenants to stay there until their lease expiry before moving in?

For example, if you're renting and you just bought a place, say your lease expires in 3 months, it would make more sense to give the existing tenant 3 months notice (so they are arent kicked out right after settlement) and you are not penalised for breaking your own lease early.

Therefore the intention here was for a PPOR, except it was an IP for 3 months right at the beginning. Seems rather unfair to be slugged a partial CGT bill because of it.
 
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