CGT 6 year rule and buying a tenanted property

[almostthere]

Hi, I am planning to buy a tenanted property. Their lease expires in another 7 months. But after the lease expiry I would like to turn that property into PPOR.

Will I be still able to claim the CGT free for 6 years ?

 

[Paul@PFI]

Ah no not really.

I can read your question two ways - Will the property be exempt under the main residence rule when you move in ? Yes. But not for the period since acquisition to date you move in.

The 6 year rule you refer to is the main residence absence rule. This law operates where a former main residence ceases to be your MR and then you have no other main residence (ie you rent) so that the MRE continues for up to a further 6 years.

In your question the property would be liable to CGT for the first 7 months. Then its your main residence. For this reason as the property was not continually your main residence then apportioning applies. Unfortunately this can have some unfavourable outcomes.

eg : Lets assume in 7 months the value of the property is identical to when acquired. A reasonable assumption. However its worth $20K more in 10 years after being your ME for 9.4years....Is there a capital gain ?? yes. The taxable gain is $10K x 213days / 3652 = $583. The longer you own it the lower the % but the higher the CGT gain in whole dollar terms. Unfortunately there is no allowance for valuation at the time a property becomes a MR. Only when it ceases to be one....

That said, if you move in after 7 months then after a period of time it becomes a IP again then the 6 year rule may apply from that time if you are continually eligible at that time. This further complicates the apportioning but the 7 months remains taxable.

So the fact is the 7 months will always be taxable if property is sold.

 

[Propertunity]

Hi, I am planning to buy a tenanted property. Their lease expires in another 7 months. But after the lease expiry I would like to turn that property into PPOR.

Will I be still able to claim the CGT free for 6 years ?

No, my understanding is (happy to be corrected) that the property will always have some CGT event when (if) you sell, because it was an IP for 7 months.

The 6yr rule is nothing to do with this scenario.

**edit** I see Paul was posting as I was writing.

 

[almostthere]

Hi Paul,

Thanks for the prompt reply.

So if I understand this correctly here is how it works (with an example)

Bought : 1/1/2015
IP until : 1/8/2015 (IP for 7 months)
PPOR Since : 2/8/2015
PPOR Until : 1/8/2016 (PPOR for 1 year)
IP since : 2/8/2016
Sold : 1/1/2025 (MR for 6 years and then IP)

Assumption : I don't claim any other PPOR from 2/8/2016 for upto 6 years (2/8/2022)

So, In this scenario I am liable to pay CGT for following duration :
1/1/2015 - 1/8/2015 ( as the property was IP for the initial 7 months after purchase)
2/8/2022 - 1/1/2025 ( as the property was IP and 6 year is over since it was MR)

Is this correct understanding ?

 

[Rob G.]

Yep

But make sure you calculate all apportionment using the exact number of days. There is a calculator on the ACTO website.

 

[almostthere]

Yep

But make sure you calculate all apportionment using the exact number of days. There is a calculator on the ACTO website.

Thanks Rob for the confirmation.
This is an excellent info.

Thanks everyone.

Cheers,