Capital gains tax advice

[The Trump]

Hi Guys

I was wondering if anyone maybe able to provide me with Capital Gain's Tax advice under the following scenario.

1. Originally purchased my house on the 10/03/2001 and payed $250k plus stamp duty of approx 15K. (ie; 265K)

2. The house was then let as an investment property from the 10/03/2001

3. On the 2/3/2008 the house was then vacated by the tenants and my family and I then moved into the house as our place of residence where we have remained.

4. Since March 2008 we have spent a significant amount of money on renovations (ie; adding a second storey), replacing the old kitchen and renovating both bathrooms (ie; with new tiles, fittings & fixtures). These renovations have cost us approx 180K.

5. We are now considering selling the property and were advised that we should get in the vincity of 900K.

I assume that given we didnt live in the property straight after we purchased it we would be subject to some sort of capital gains tax (ie; if we did infact sell for lets say 900K.)

However I am trying ascertain how much tax we would have to pay given the circumstances (ie; having it rented out originally but then moving in and spending all that money on the renovation)

Would appreciate anyones assistance and guidance as to how I would work it out.

Cheers

The Trump

 

[depreciator]

You didn't happen to get a value put on the property before you moved back in, did you? That's what you ideally need to calculate the gain from purchase till it stopped being an IP.

 

[Aaron_C]

You didn't happen to get a value put on the property before you moved back in, did you? That's what you ideally need to calculate the gain from purchase till it stopped being an IP.

True but valuers can do a retrospective valuation.

 

[The Trump]

Hi Guys

Thanks for the reponses.

Yes I did infact have a realestate agent value the property and provide me with it in writing and he indicated it was around the 620K mark

Thanks

 

[Jeith]

Your renovation costs whilst it has been your PPOR can be added to the cost base. Valuation at the date you moved in is not applicable in this instance - only if it was your PPOR first and then IP. The Capital Gain is just apportioned over the time it was an IP (7yrs of 11)

 

[The Trump]

Thanks for all the advice.

So basically I take the original purchase price + stamp duty (ie; 265K) add the renovations to the cost base (ie; 180K) = $445K.

If I was to sell the property for 900K then I subtract 445K = 455K capital gain.

Given that I have owned the property for more than 12mths I assume I would be entitled to a 50% discount on the capital gain (ie; 455k / 50% = 227K)

So is it case that I divide 227K by four (ie; the time that I was living in it).

So I would be required to pay approx 57K in capital gains tax

 

[Rob G.]

Yep ... apportion by time based on the limited facts.

So you get to pay CGT on a portion of the capital appreciation due to your beautiful reno (less expenses added to cost base).

Of course, you will get specific professional advice based on full facts.

Cheers,

Rob

 

[marg4000]

As Jeith said.

If it is an IP first then you can only go with the proportion of time method. You will add the cost of renovations to the cost base, then 50% of 7/11th of the profit (in round figures) is added to your income for the financial year in which you SIGN THE CONTRACT.

If the property is in joint names then each party includes half of the above in their tax return.

As it is close to the end of this financial year, consider carefully which financial year you want this extra income in. By delaying signing a contract until early July you will have the use of the money for at least an extra year.
Marg

 

[The Trump]

Thanks Marg gives me an appreciation of how complicated CGT can be.

The property is in both my and wifes name.

I do aplogogise for my lack of knowledge on this subject its all new to me.

I understand the principle that you will add the cost of renovations to the cost base.

However get a little confused when state then its 50% of 7/11th of the profit (in round figures) is added to your income for the financial year.

Just trying to get me around how I actually work that out

Cheers

 

[Terry_w]

It was an IP for the first 7 years and you owned it for 11 years in total.

Also you could get the 50% discount as you held it more than 12 months.

 

[marg4000]

For clarity it is probably best to work in months.

Calculate the total number of months the property was owned (obviously you can only do this once a contract is signed).

Then calculate the total number of months it was rented.

This will give you the proportion of time it was rented and subject to CGT. I went with the 7/11 on the basis of 11 years owned with 7 years rented.

Then you get a 50% reduction because you held the asset for more than 12 months.

Then you split the profit between yourself and your wife and each declares:

50% of 50% of 7/11ths of the PROFIT - and adds this to the other income in the financial year in which the sale contract is signed.
Marg

 

[The Trump]

Thanks Margaret

So would this be the correct way to work out the capital gain payable (ie; roughly of course)

Cost base = 445K (ie; original price + purchase price + reno costs)

Lets say we sold for 900K , then the capital gain would be 445K

Given that we have had the property a year we receive a 50% discount on the capital gain . So that would be 227K. So capital gain's tax payable would be 227K.

Then I work out the number of days the property was rented which was approx 2555 days / number of days the property was live in which is 1465 = 1.74440273

So is it a case that I mulltiply 227K * 1.7444 = 395K (ie; capital gain tax amount payable however that doesnt look right to me obviously missing a step)

Or is it 112K (ie; 445K less 50 %, less 50%) * 1.74440273 = 194K

 

[Nemo30]

Then I work out the number of days the property was rented which was approx 2555 days / number of days the property was live in which is 1465 = 1.74440273

I could be wrong, but I think you got this around the wrong way.

Look at the total number of days you held the property - 4020
and the number of days it was an IP - 2555

Therefore the calculation is 2555/4020 = .635 rather than your 1.7

 

[marg4000]

Trump is right.

You work out the total number of rented days / total days owned.

Marg

 

[Nemo30]

Trump is right.

You work out the total number of rented days / total days owned.

Marg

He would be right if that is the formula he used - but he didn't. Which was the point of my post above.

He used number of rented days/ number of lived in days which is incorrect.

 

[investor2009]

This thread is very similar to one that I was discussing a little while back. Still didn't get a real answer..

Perhaps someone can give a definite this time? Worth a shot anyway.

Situation: Bought house, was an IP for 1 year, lived in for two years, spent $60k on improvements, moved out, it is now rented.

I want to claim the PPOR exempt on it within 6 years of moving out, so it looks to me (as mentioned above) that the calculation would be: taxed on 1/7th (if hypothetically sold within 6 years of moving out) of any capital gain. Right?

 

[tobe]

Perhaps, however you cant have a foot in more than one house, so while you are claiming the 6 year rule, the house you then moved to, is liable for CGT. This is fine if your renting, or accomodation is given to you by your employer, but if it isnt your just delaying CGT by moving the liability from one property to another.

 

[investor2009]

Thanks Tobe!

I know it may sound strange, but in my instance, it works perfectly.
What I'm aiming for is to pay off our current mortgage (or close to) in the next 6 years. It currently stands on an IO loan, and I calculate we may be able to gain $400K from the sale of our old PPOR, pretty well pay off our new mortgage, and that completes one part of our move toward financial freedom. Without ever paying off any of the principal ourselfes, and only take 6 years to do so. We don't care (in this particular instance) that we will have to pay the tax one day, because it allows us far more in return. Not a traditional way of doing it but I'm not a by the book man.

From then on in we understand we will be liable for that period (6 years) to be up for CGT, but the longer we hold the property as our PPOR, the less that will be. I don't have any idea how long we might stay there for though.

Thanks again.

 

[Ed Barton]

Perhaps, however you cant have a foot in more than one house, so while you are claiming the 6 year rule, the house you then moved to, is liable for CGT. This is fine if your renting, or accomodation is given to you by your employer, but if it isnt your just delaying CGT by moving the liability from one property to another.

it does give you some flexibility in deciding which property is going to be declared as your POOR. obviously you choose the one with the greatest gain to be your PPOR.

 

[kiwipaul]

Situation: Bought house, was an IP for 1 year, lived in for two years, spent $60k on improvements, moved out, it is now rented.

I want to claim the PPOR exempt on it within 6 years of moving out, so it looks to me (as mentioned above) that the calculation would be: taxed on 1/7th (if hypothetically sold within 6 years of moving out) of any capital gain. Right?

IP for 1 year
PPOR 2 years
Rented 6 years (but claimed as PPOR)

Total 9 years but only IP for 1 year so CGT = 1/9th (you also get 50% CGT allowance)

This is my understanding.