Advice Please

[Pom]

Hi

My wife and I are due to return to Australia from the UK in June. We have a house in Canberra which we bought in 2002 as our primary residence. In May 2003 we moved to the UK for work commitments and have rented out the property since then.

We aren't planning on returning to Canberra and will be living in Sydney. Therefore a couple of questions:

1. As the property is / was our primary residence (we don't have any other properties) can we sell upon our return and avoid CGT?

2. If we choose to keep the house as an IP, can we remortgage to release equity, use that towards purchasing a new residence for ourselves in Sydney and negatively gear on the whole amount borrowed?

I'd welcome any other advice or insights if i've missed anything major!

Thanks in advance.

 

[sailor]

Hey Pom, welcome to SS. My thoughts below:

Hi

My wife and I are due to return to Australia from the UK in June. We have a house in Canberra which we bought in 2002 as our primary residence. In May 2003 we moved to the UK for work commitments and have rented out the property since then.

We aren't planning on returning to Canberra and will be living in Sydney. Therefore a couple of questions:

1. As the property is / was our primary residence (we don't have any other properties) can we sell upon our return and avoid CGT?
Probably not...it's been rented for the past 5 years. So selling wouldn't be something I'd personally consider, as I don't like paying CGT.
2. If we choose to keep the house as an IP, can we remortgage to release equity, use that towards purchasing a new residence for ourselves in Sydney and negatively gear on the whole amount borrowed?
Yes, I would expect so. Price of houses in Canberra have increased quite a bit over the past 5 years, and so you would have accrued quite a good equity I'd imagine. Provided ofcourse that you haven't refinanced it in the last couple of years.
You could use the equity to fund a deposit on your new PPOR in Sydney. However, an accountant would advise if you could use that loan interest as a tax deduction. (I don't think you can. The tax deductible interest has to be from a loan you use for investment.) But I'm no expert in this area.
I'd welcome any other advice or insights if i've missed anything major!

Thanks in advance.

 

[WallyB]

Hi Pom

my understanding is as follows:

Q1 If it's your only property u can avoid the CGT if held less than 6 years. This was a rule bought in to protect diplomats but we can all enjoy

Q2 It's the pupose of the loan than determines if it's deductible. Any loan for a new PPOR won't be deductible

 

[Perp]

1. As the property is / was our primary residence (we don't have any other properties) can we sell upon our return and avoid CGT?

Yes, you can retain your PPR exemption for CGT purposes for 6 years provided you weren't claiming another primary residence (ie you can only have one at a time!), which it sounds like you weren't. So yes, you should be able to sell CGT-free.

2. If we choose to keep the house as an IP, can we remortgage to release equity, use that towards purchasing a new residence for ourselves in Sydney and negatively gear on the whole amount borrowed?

Absolutely not. As sailor said, the additional amount borrowed would not be tax-deductible as its purpose was to buy your PPR, not investment.

Just noticed WallyB has posted the same response. I'll still post as it may increase your confidence in the accuracy of our answer.

Welcome home (in advance)!

 

[Pom]

Thanks guys.

With respect to the 6 years, I assume it would start ticking from when we moved out, i.e. May 2003 and not the date of our purchase in 2002?

Also, its rented out on a 12 month contract expiring December this year (great forward thinking eh!). Assuming the above is correct does that mean we have to physically complete a sale before May 2009 to avoid CGT or does having the property on the market count if a subsequent sale ensues?

Anyone fancy a great 3 bed in Hackett, 750 sq m block with a good sitting tenant.

 

[Perp]

With respect to the 6 years, I assume it would start ticking from when we moved out, i.e. May 2003 and not the date of our purchase in 2002?

Yes, the 6 years goes from the date you moved out up to contract date (not settlement), or the date you nominate a new PPR, whichever comes first. Even if you have a bit of overlap, you don't lose the whole exemption - you'd just have to have the place revalued when one of these events triggers the end of your PPR exemption.

So if you don't buy a new PPR, you have CGT-free until May 2009. If you didn't get a contract signed for sale until July 2009, you'd only have to pay CGT for the 2 months, not the whole lot, so really no big deal. Your valuation in May 09 is unlikely to be significantly below the sale price in July, if at all.

If you buy a new PPR when you arrive in June 08, then you'd have to decide whether:

1) your Hackett property remains your PPR - in which case you have to pay CGT on the increase in price on your Sydney property between Jun 08 and contract date at Hackett, or

2) Sydney becomes your PPR in Jun 08 (meaning its ultimate sale, provided you live in it then sell it, is entirely CGT-free), and have your Hackett property valued at Jun 08 and pay CGT on the change in value between June 08 and ultimate contract date.

Personally, I'd go for the latter option simply because the CGT incurred on Hackett, if you leave it on the market, is unlikely to be significant, and it keeps the Sydney PPR "clean" of accounting complications. I also think the Sydney market could be about to take off, meaning you may incur some substantial CGT under option 1 if you don't sell Hackett quickly.

 

[Pom]

Thanks Ozperp - very informative.