Advice on PPOR and CGT

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From: Anonymous


Hi All,

I have spent some time trawling through the ATO site to try and find the answers to the attached questions, but drew a blank (lots of great info. on PPOR, CGT and negative gearing, but no combined info!).

1. I understand that having lived in it first, you can rent out your 'Principal Place of Residence' for no more than 6 out of ten years without compromising the 'Main Residence Status' and thus avoid CGT upon selling. However, does anyone know whether you can still claim CGT exemption if you avail of the normal NG tax benefits, eg: building/fittings depreciation, during the rental period?

2. If you purchase a property, live in it for a number of years, renovate it extensively and then rent it out, as follows:

1995 Purchase property for $211k (incl. purchase costs)
1998-2002 Spend $320k extensively renovating property (market value now $650k)
2002-2007 Rent out property (deduct depreciation of $27k ? buildings and $26k fittings)
2007 Sell property for $745k (net of selling costs)

If the above property was subject to CGT upon selling, would the 'Cost of Acquisition' be deemed to be $211k or $531k ($211k + $320k)?

3. Using the details in 2. above, if the Cost of Acquisition is deemed to be $531k, the mortgage is $400k, i.e. personal funds were used to pay for some of the works, and the mortgage is increased to $531k prior to renting, will interest relief be allowed on $400k or $531k?

Any insight, as always appreciated:)

Regards.

Fiona

P.S. Does anyone know how you can post using your forum name without your email address being displayed (and thus being a target for even more SPAM!)
 
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Reply: 1
From: Dale Gatherum-Goss


Hi Fiona!

>I have spent some time
>trawling through the ATO site
>to try and find the answers to
>the attached questions, but
>drew a blank (lots of great
>info. on PPOR, CGT and
>negative gearing, but no
>combined info!).


I does get that way, doesn't it. Information overload and not what you actually wanted.


>1. I understand that having
>lived in it first, you can
>rent out your 'Principal Place
>of Residence' for no more than
>6 out of ten years without
>compromising the 'Main
>Residence Status' and thus
>avoid CGT upon selling.
>However, does anyone know
>whether you can still claim
>CGT exemption if you avail of
>the normal NG tax benefits,
>eg: building/fittings
>depreciation, during the
>rental period?


OK, there is no such rule as 6 out of 10 so I think you must have misunderstood something somewhere. If you rent your PPOR for no more than 6 years at a time, and move back in, between each rental period, then you will have no CGT at all regardless of how often you do this.

Yes, his applies even where you claim all the tax deductions for interest, rates, depreciation and everything else.



>2. If you purchase a property,
>live in it for a number of
>years, renovate it extensively
>and then rent it out, as
>follows:
>
>1995 Purchase property for
>$211k (incl. purchase costs)
>1998-2002 Spend $320k
>extensively renovating
>property (market value now
>$650k)
>2002-2007 Rent out property
>(deduct depreciation of $27k ?
>buildings and $26k fittings)
>2007 Sell property for $745k
>(net of selling costs)
>
>If the above property was
>subject to CGT upon selling,
>would the 'Cost of
>Acquisition' be deemed to be
>$211k or $531k ($211k +
>$320k)?


The property will not attract CGT if you elect it to be your PPOR for the time that it was rented. However, in doing so, you may lose the PPOR on your new home and so it might be subject to CGT when you eventually sell that in time to come.

Assuming that you do not elect to treat this house as your PPOR then the CGT will actually be calculated as the sale prices (less costs of selling such as real estate fees, legal fees etc) minus the market value of the house at the time that it ceased to be your PPOR. So, as you can see, the actual cost is irrelevant.

Therefore, if you do intend to move out and rent the house, you should probably arrange a market valuation (even 3 market appraisals from local R/E agents) and then file it away for future reference.


>3. Using the details in 2.
>above, if the Cost of
>Acquisition is deemed to be
>$531k, the mortgage is $400k,
>i.e. personal funds were used
>to pay for some of the works,
>and the mortgage is increased
>to $531k prior to renting,
>will interest relief be
>allowed on $400k or $531k?


Unless you use the extra drawn down funds for investment purposes, the interest allowed as a tax deduction will be based on $400k and not $531k.


I hope that this helps in some small way and Have fun

Dale
 
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Reply: 1.1
From: Anonymous


Dale,

Many thanks for the prompt answers

Regards,

Fiona
 
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Reply: 1.1.1.1
From: Projects .


"24. The question has been raised with this Office whether, in a situation in which the sole or principal residence exemption would otherwise be denied to a taxpayer because a dwelling is used for the purposes of gaining or producing assessable income , the exempt status of the dwelling would be preserved if the taxpayer made no claims under subsection 51(1) for allowable deductions in relation to the income earning activities. Whether or not deductions are claimed or allowed in relation to the income producing activities does not affect the capital gains tax status of the dwelling. Subsection 160ZZQ(21) applies where a sole or principal residence is used for the purpose of gaining or producing assessable income and does not depend for its operation on whether income tax deductions are claimed or allowed. "

With my limited understanding it would appear that based on the above, any person carrying on any work at home would make their PPOR liable to a CGT bill upon sale. How many people claim deductions for items at home that they say they use to earn an income or people telecommuting? What am I missing?

Projects

There is more than one way to climb a mountain.
 
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Reply: 1.1.1.1.1
From: A Jones


Hello Projects,

In the topic immediately above I alluded to the possibility that the ATO could disallow part of the exemption from CGT if they considered an income producing activity had been conducted from the PPOR.

Such a situation occurred in the following Administrative Appeals Tribunal decision: -

http://law.ato.gov.au/atolaw/view.htm?basic=+160zzq(11)&&docid=JUD/39ATR1052/00001

Mrs Cheung does not appear to have been cut any slack by her former employer (the ATO).

I assume the ATO would usually apply its own ruling (IT ruling 2673 below). If so a taxpayer would seldom need to appeal to the Administrative Appeals Tribunal.

http://law.ato.gov.au/atolaw/view.htm?locid='ITR/IT2673/NAT/ATO

Any views on this Dale?

A Jones
 
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Reply: 1.1.1.1.1.1
From: Dale Gatherum-Goss


Hi

The explanatory memorandum to Section 118-190 stated:

"current administrative practice is to accept that the exemption is not affected where part of the dwelling is used as a home office . . ."

Whilst this does not relate specifically to the question at hand, it does show that the Government do not intend you to pay CGT on the sale of your PPOR where it earns rent.

However, I must stand corrected and note that if you claim the interest on the loan, then you will pay CGT on part of the sale proceeds.

I apologise if I have misled anyone.

Humbly . . .

Dale
 
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