Capital Gains Tax advice

[The Porky]

Hi everyone

I was wondering if anyone maybe able to provide me with CGT advice and what we maybe subject to pay on two separate properties

Here is a brief description of our situation:

Property 1:

a. Purchased my first home in January 1993 (ie. in my own name) for a $93,000 where I lived for a number of years before moving interstate.

b. After I moved interstate I arranged for my parent?s to move into the property where they have remained free of charge ever since

c. The property has never been rented as a result it has never ever been included in any of my tax returns as a rental property to the ATO

d. I recently has this property valued which came in around the vicinity of 520K

Property 2:

a. Then in March 2001 purchased another home with my wife (ie. in both our names) and payed $250k plus stamp duty of approx 15K. (ie; total = 265K).

b. We had intentions of moving into the house straight away but because of work commitments we had to remain in Sydney indefinitely.

c. The house was then let as an investment property from March 2001.

d. In March 2007 my family and I moved back from Sydney (ie. house vacated by the tenants) and it became our place of residence- where we have remained until now.

e. We then had the property re-valued (ie. in March 2007) as we were considering a renovation and wanted to ensure that we didnt over capitalise. That valuation came in at $530K.

f. In March 2010-September 2010 we renovated the property spending 180K.

g. Recently we had this property revalued and were advised that it was in the vicinity of 850K

We are looking to sell property 1 howevr before we do so I am trying to understand the CGT tax consequences (ie. if infact there are any) and the impact that CGT tax may have on property 2 and if we sold that in the future.

Trying to determine what the best options would be and how one would go about calculating the capital gain on both properties that would be applicable based on the details above

If it could be articulated in the way that I could follow based on the numbers and time frames detailed above I would really appreciate it.

Cheers

 

[marg4000]

OK, I'll have a go.

House 1.
CGT free for the time you lived in it + 6 years. (so long as you did not rent it out before you moved in.)

After that CGT applies. The fact that you parent did not pay rent is irrelevant, YOU no longer lived there so it was not your PPOR for which you get exemption.

CGT payable on increase in value from (first sentence) till sale.

House 2

CGT payable. As you rented it first, capital gains will be calculated on the percentage of time you lived in it. i.e., owned for 10 years, you lived there for 5 years, CGT payable on 50% of the increase in value (based on cost of buying plus any renovation costs). Interim valuations are not relevant.

A 50% CGT discount will also be allowed since you have owned the asset for more than 12 months.

As always, you must check with an accountant who will give you specific advice when you supply relevant figures.
Marg

 

[Paul@PFI]

Cgt

First - In life beware of anything that appears free. You wont get "CGT advice" here. You will get replies. Some good, some bad and many unqualified.

Lots of issues affect your calc. I would argue its worth seeking competent professional advice. As a tax professional I cant reply to a posting and do this as a community service. Happy to speak though if you call me.
Some brief guidance :

1. Prop 1 will be subject to CGT. The period you were absent and where you lived will be important as a period appears exempt buit it has a end date. Need to determine when that was. But you will likely have a CGT exemption for some period. There are ownership costs which will reduce substantially the capital gain. eg council rates etc since you havent claimed a deduction when it was not owner occupied. Do you have records of all those costs ?. The apportionment basis needs more info relating to where you lived etc. Also expected selling costs and any works needed to prep the property prior to sale.

2. Prop 2. will be subject to CGT and an apportionment will be required also. The issue of additions to the cost base will reduce the impact. The issue of failing to reside in it isnt normally favourable. To claim a main residence you must have resided in the property - Merely expecting to do so is generally fatal to exmptions. The 2007 revaluation isnt relevant in your circumstance - Many people think that they can get a valuation (say 2007) and CGT appies only to the change since then. Doesnt work that way sorry.

 

[The Porky]

Thanks Marg for your reply most appreciated.

Could I just clarify something with you.

In terms of property 1 given that I lived there for approx 2 years (ie. from January 1993 to February 1995) would that mean that the property is therefore exempt from CGT tax until 2001.

If the properties value in 2001 was 380K and I sold it next year in January 2014 for 520K to calculate the CGT payable would be as follows:

Amount received on house when sold: $520,000
Less: market value of his house in 2001:$380,000
Capital gain: $140,000

140K (gain) x 4735 (days over 6 years) / 7665 (total days) = $86,000.00

Is that your understanding as to roughly how it would be worked out

One more question would I also be allowed a 50% CGT discount on property 1 given that I owned it for over 12mths

Thanks for your feedback I really appreciate it.

 

[Rob G.]

Since property 1 was initially a fully exempt main residence and it has not been used for earning assessable income then you could elect for it to remain your main residence throughout.

However, your wife would need to nominate it as well which means neither gets a property 2 exemption even whilst lived in.

Look to which one gets the best apportioned exempt amount if you don't elect property 1 during your absence.

Cheers,

Rob

 

[marg4000]

No, capital gains would be the whole amount between the 2001 valuation and the sale price. This would be discounted by 50% for owning it for over 12months.

You only use the percentages if the property was rented BEFORE it becomes your PPOR.

Please consult an accountant for accurate advice and correct figures.
Marg

 

[GaryT]

You may elect property 1 to be your PPOR for the full ownership period and be totally exempt from CGT. This is because this property did not earn income and therefore the 6 year rule is not relevant.

You moved into Property 2 in March 2007 and therefore you have the option to choose this property as your PPOR from this date. This property will always have a CGT liability unless you die in it. CGT will be calculated on a proportional basis. You will need to keep good records which can be a hassle.

If you choose to make Property 2 your PPOR from March 2007 then Property 1 will become subject to CGT from that date on a proportional basis because it never earned income - there is no need to get a valuation for Property 1 as this would only apply if it earned income. This option would require good record keeping for Property 1 for the full ownership period which may be difficult.

Do the sums and choose the option that provide the best tax outcome. The decision to choose which property is your PPOR is made in the tax return for the year in which the first property is sold. Most people just choose the option that defers CGT for as long as possible (which is not always best).

There is a bit of conflicting opinions here so as everyone says use this as a guide to seeking good professional advise.

 

[The Porky]

Good afternoon all

Thank you for all your replies most appreciated

Have a good weekend