CGT and the 6 year rule

[MSK]

hi guys.... I havent been on here for a while as my steam for property investment has slowed down and we are considering selling our IP to pay off our PPOR and then just see what comes next... I need some help with calculating the CGT payable upon sale of this IP which was once our PPOR.

Here are the numbers:

Property is in both mine and husbands name and we both work.
Purchase land in Sept 2001, built and occupied home in Sept 2002. Total cost was $435000 (not including SD and legals).
Lived there until Jan 2007 when we rented it out. Did not get a val done until Nov 2008.
We rented until Nov 2008, and bought another PPOR at that point.
6 years was up in Jan 2013. Got a market appraisal for $780k (no sworn val done). Bank Val done in May 2013 for $850k.
Will be put on market on 1 Sept 2013.
Assume sale takes place 1 Oct 2013 2013 for $870k.

How do we calculate CGT payable seeing there is no vals done when it became IP, and latest val is 4 months post the 6 year mark. Also, we are happy to forfeit main residence status on our current PPOR for the 5 years between Nov 2008 and Oct 2013.

Waiting for ATO to return my call so I can discuss the situation with them.

 

[GaryT]

Home is reset to market value when first rented out in Jan 2007. So you need to get a valuation as at that date.

If you choose to take advantage of the 6 year rule for this property then this will extend the CGT exemption until Jan 2013.

CGT is then calculated on a proportional basis for the balance period from Jan 2013 to Oct 2013. i,.e. Taxable Capital Gain (in very simple terms) = (Sale price - Market value at Jan 2007) x Days between Jan 2013 and Sale Date / Days between Jan 2007 and Sale date

 

[MSK]

OK, thanks so much for the reply GaryT. That confirms exactly the understanding I got from the ATO website. My question then would be can I engage a valuer NOW to estimate market value at Jan 2007. I don't believe we had a valuation done at that point in time.

If not, then can we just use the original purchase cost as the cost base and then use total ownership days from Sept 2002.
ie. (Sale price - Cost Price) x Days between Jan 2013 and Sale Date / Days between Sept 2002 and Sale date.

By the way, does total ownership days start from date we exchanged on the land (sept 2001) or when we occupied the place after build (Sept 2002) ?

 

[cmason]

If you use the 6 year rule to claim PPoR CGT exemption my understanding is when you sell your current PPoR you will need to pay CGT for the period Nov 2008 - Jan 2013

 

[MSK]

Yes that's absolutely correct.

So although we never really intend to sell our current PPOR, I am a little confused as to what to do.

I am also thinking if it is an option to obtain a val (for both properties) for a point in time since which there has not been significant capital gain on current PPOR (eg. say end 2010), and then get a val at time of sale of IP. Then if ever we sell current PPOR, the recorded capital gain for that period would be minimal, and I would also have increased exemption period on the IP to end 2010. Doable ??

 

[S.T]

Yes a valuer can do a valuation from a certain point in time.

 

[GaryT]

You need to use the date that the property was first available for rent as the start date for CGT purposes and the proportional calculation.

The capital gains tax event arises on the date you agree to sell (contract date). However the proportional calculation for calculating the CG uses the settlement date.

If you use the 6 year rule for the original property then your new PPOR will always be subject to CGT from the time you move in until when the original property is sold. i.e. you can only ever choose one PPOR at a time for the CGT exemption.

CGT on the new property will be calculated on a proportional basis - no need to get a valuation on it - but be prepared to keep every receipt for any holding expenses for the life of your ownership including rates, interest, and maintenance (i.e. light globes!). However one small loophole is that if you die in this new house then CGT is waived.

You really need to do the CGT calc for the original property and then compare this to the possible alternative of declaring the new property for the full ownership period and then make an informed decision on which way to go.

 

[MSK]

GaryT, when you say I should keep all receipts for the life of ownership, why will I need receipts AFTER the sale of the first property ? Wont main residence exemption kick in after that date ?

 

[MSK]

Re: above comment
Main res exemption kick in after the 6 year absence end date ie. Jan 2013, not after sale date.

 

[GaryT]

If you choose to use your PPOR exemption on the original property, then PPOR exemption on the new property starts from the date of sale of the original property as you indicated.

However it is the method of the calculation for the new property that manners because it is done on a proportional basis.

So the calculation (in general terms) is Taxable Capital Gain = (sale price -purchase price - holding costs) * period held where no PPOR exemption / total ownership period. Holding costs includes rates, interest, maintenance, etc.

So you can see that you are stuck with keeping good records for the term of ownership. This is a flaw with the legislation that causes major grief.

You really need to see your accountant at this stage.