Capital Gains & CGT vs PPOR loan repayments

[dwv]

I know CGT has been previously discussed here a lot and I have aslo been checking the ATO site. I was just analysing the effect of the IP payments on our current PPOR loan. I have laid out the figures and been computing and comparing. Not good in math but I think simple arithmetic did the job.

Although we plan to hold the property for 5 to 7 years, we're worried about the effect of capital gains tax if we do need to sell it earlier, say in 2-3 years time. Currently, we have a property of residence which we just bought 6 months ago and we're worried on the effect of taking out most of the money from the offset account as we think it will add at least $500 to our monthly repayments (but still below the amount we pay monthly - we put double the amount). Anyway if, for example, we have the following scenario, what would be the correct CGT?

Value of Prop: 500K
Yearly rent: 25K (480/mo)
Inital cost/deposit: 45K
Loan from Bank: 485K (500K + 30K -> fees, stamp duty, LMI, etc. -45K)
MOnthly loan repayment: 3150
Depreciation: 15K-20K (???)
Extra cost per year: 5K
Property Mgr per year: 2K
Value of Property in 3 yrs: 600K (realistic 6% growth? or still conservative? or too much? - property is in Kellyville Ridge/The Ponds area)
Cost of selling property: 10K (docs + few aesthetic fixes)

Would the capital loss include all payments for the past years (minus total rent)? So, if I sell after 3 years:

600K - 500K = 100K ===> capital gains

(3150 loan payment x 12mos x 3yrs) - (480 rent x 52wks x 3yrs) = 38520 ===> out of pocket loan payment

100K - 38520 - (5K extra cost x 3yrs) - (2K prop mgr x 3yrs) - 10K cost of selling = 30480 ===> taxable capital gains?

Other questions:
1. Is the above computation correct or will the whole 100K be taxed as my losses were already deducted from previous taxes anyway?

2. What would be the realistic cost of selling the property if it has been kept spic and span (fees, contracts, etc)?

3. What's the effect of depreciation on CGT?

4. How will CGT be computed? I know it will be halved if we hold it for more than a year but, for example, we earn 60K each/year (30% tax bracket) and we have approx 30.5K CG (or 100K CG???), how will we be taxed? I read the CGT will not be separated from the person's main source of income.

5. As I mentioned earlier, the repayments on our residence will have $500 more each month meaning approx 18K more in 3 years. If we paid 38520 out-of-pocket rent for 3 yrs + 45K initial deposit + costs for 3 years for the IP, we could have deducted 132520 (18K + 114520) more from our current loan (residence). If tax would be deducted from the taxable capital gains (assuming 40%/2 = 20% tax on CG), the net earnings would be 24384. I would still have the 69.5K non-taxable capital gains + 15K left from paying off loan from bank (500K - 485K loan), so this would mean a total of around 108.8K (24384+ 69.5K + 15K) which is still lower than the 132K we could have used paying off our current loan... but assuming we got around 7K a year from tax returns, that's 21K more meaning 108.8K + 21K = 130K ==> which almost the same! (of course assuming 6% increase in property value a year... but I read will remain flat for a few more years! Might even go down - oh no!!!). I'm getting confused... did I make any sense? All the trouble for nothing?

6. Am I complicating things of will the CGT compuation will just be 100K x 20% = 20K, meaning a net of 80K + 15K (after 485K loan re-payment) = 95K + 21k tax return (3 years) = 115K which is 17K below the 132K that could have been deducted off our loan. This doesn't really make sense. It seems that to just break even, we need 10% appreciation of value per year and higher yield, or really wait and sell it a bit more later before we sell it to gain more value.

Please tell me I'm wrong here...

 

[redsquash]

DWV,
There is no CGT on a PPR,for a normal suburban block
unless the property is more than ............. 5 acres or there abouts..... this figure may be wrong , but it a big piece of land anyway by suburb standards.

The period you hold is irrelevant.
If you rent your ppr you have 6years from the start date of renting before CGT will kick in. Even then if you go back to the property prior to 6 years then it can once again be your PPr and the 6 year rule starts again

 

[dwv]

DWV,
There is no CGT on a PPR,for a normal suburban block
unless the property is more than ............. 5 acres or there abouts..... this figure may be wrong , but it a big piece of land anyway by suburb standards.

The period you hold is irrelevant.
If you rent your ppr you have 6years from the start date of renting before CGT will kick in. Even then if you go back to the property prior to 6 years then it can once again be your PPr and the 6 year rule starts again

Hi Red,

Sorry if it was a bit unclear. We have a PPOR which is 6 months old and are planning to buy another one for iP. PPOR is 500K (with 390K still left on the loan), IP is 500K (485K loan).

 

[davewill]

hi dwv,
my understanding would be that your capital gain calculation ignores costs already deducted. your cost base also reduces if you depeciate certian things.
for example:
500k purchase price
30k purchase costs (certain purchase costs cant be claimed in yearly return)
Initial cost base of 530k
Depreciations claimed against your salary over 3 years 45k
Cost Base for cgt calcs 530k-45k=485k
Sell property for 600k, with 10k advertising/agent fees.
cap gain is (590k-485k)/2=52.5k
dave

 

[davewill]

btw your capital gain is added to your income for that year, so if you sold your property at the start of the tax year your taxable income would be something like this:
60K+52.5K(if property solely yours)=112.5k
i think tax rates are 30% up to 75k and 40% up to 150K, so your extra tax bill for that year would be approx 20K which you wouldnt have to pay until the following years tax return.

 

[dwv]

btw your capital gain is added to your income for that year, so if you sold your property at the start of the tax year your taxable income would be something like this:
60K+52.5K(if property solely yours)=112.5k
i think tax rates are 30% up to 75k and 40% up to 150K, so your extra tax bill for that year would be approx 20K which you wouldnt have to pay until the following years tax return.

Thanks davewill for clearing it out. I also realised I complicated the whole situation. We do have 18K extra repayment for the PPOR loan after 3 years (500/mo x 3 yrs) if we use our offset for the initial deposit. However we would only subtract 1.5K from the current monthly repayment for our PPOR to pay off the yearly interest and costs on our IP. So 1.5K x 12 mos x 3 years = 54K, plus the 18K extra repayments ==> 72K, plus 45K initial deposit which totals 117K for three years. If we proceed with the IP, our total money if IP value is 600K is... 100K - 20K CGT = 80K, plus 15K (after 485K loan repayment) ==> 97K, plus 8K tax refund x 3 years = 24K ==> 97K + 24K = 121K... which is nearly equal 117K if we have not proceeded with the IP. I think this makes much more sense. If I sell the IP after 3 years, I would still have avoided a loss. The IP, I think will profit after 5 years or so depending on the yearly appreciation and the adjustment of rent... I would hope so...