CGT Main Residence Exemption (6 years)

Discussion in 'Accounting and Tax' started by Thrawn, 27th Nov, 2006.

  1. Thrawn

    Thrawn Member

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    Are you allowed to claim expense deductions on a rented out property under Main Residence Exemption status ?

    Eg,

    Buy a house in January 2007. Claim FHOG, Stamp Duty concessions, etc. Move in to the house immediately.
    Move out of house in July 2007 (not to another PPOR). Rent it out (pay tax on rent income). Start claiming interest expenses on the mortgage, depreciation, repairs, rates and the like.
    Sell or revalue in July 2013 and this date will become the new CGT cost base ?

    In the meantime, not purchase another house as PPOR of course.
     
  2. DaleGG

    DaleGG Member

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    Hi and welcome to the forum

    Yes, you can still claim interest, rates, insurance, repairs, and depreciation on both the chattels and the building (if appropriate) against your rental income even though the property is still your PPOR for CGT purposes.

    This is because the costs are incurred in earning your income and the tax law says that as a result, they can be claimed.

    I hope that you hang around for a while and contribute your knowledge, experience and opinions for us all to benefit whilst you are learning from the collective here.

    Dale

     
  3. dave99

    dave99 Member

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    You can claim deductions against your rental income regardless of the PPOR status. The PPOR status only affects whether you pay CGT.

    For CGT, you can live away from your PPOR for up to six years before the PPOR exemption "expires". Also, if you move back in at any time, then move out again, the six years starts again.

    Of course you can only have one PPOR at a time, so if you move out, the new place you live in cannot be your PPOR.

    For more info: http://www.ato.gov.au/individuals/content.asp?doc=/content/36887.htm

    - Dave99
     
  4. Thrawn

    Thrawn Member

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    Sounds like a great way to go for young guys like me starting "property investment" then. You can make use of your PPOR CGT exempt status from as early as possible before you start a family and have to move out of your parents house. Much better than a straight IP from day one.

    The lack of deductibles and rent income for the first 6 months will be offset by the FHOG and stamp duty concessions. And you have 6 months to do minor renovations to improve the rent yield, increase the equity value and do a top-up on your loan for future "investment expenses". Plus you get a feel of "owning your own home" and living in it, for a short while anyway :)
     
  5. alexlee

    alexlee Member

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    I disagree. You could just buy an IP and never sell. You'll never have to pay CGT then. If you were a young person without a family, I'd suggest going for IPs first. Personally, I think the 6 year exemption isn't that useful because 6 years is a pretty short time when it comes to property.

    Say you buy a property for $200k. In 6 years the propety goes up 50% to $300k (pretty standard). You pay zero CGT instead of 20% (assuming you make up to $100k salary + $50k CG). i.e. you save $10k. Sounds great, until you buy another IP for $300k which costs you more than $10k in stamp, etc. In any case, buying the IP in a trust could allow you to pay very little CGT if you have say a non-working spouse.

    Why not just do renos, etc to an IP? You still get to claim deductions.

    You can always 'save' your FHOG for your actual PPOR. That feelign of 'owning your own home' is emotional only, as most of it is actually owned by the bank (though you control it, which is the important thing, anyway).

    I'd suggest not getting emotionally attached to property that you 'control' (and, give the LVR, do not really own). Clouds judgement, IMHO.
    Alex
     
  6. Thrawn

    Thrawn Member

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    Well, sooner or later, someone has to pay CGT (unless the law changes). Even when you die, your benefeciaries will have to pay the CGT if they sell the property. The interesting thing though, is CGT is a tax that can be deferred pretty much forever as long as you don't sell it. So that 6 years worth of CGT that you accumulate now, is in effect a very small amount of tax in 30 years when you sell.

    When you're young, 6 years is a long time. A lot can happen in that time, I might decide to start a business requiring a lot of extra capital, might move overseas, etc.

    You actually save $20k in CGT on that example. CGT will hit mostly on the top bracket (40% odd), so $100K CG * 40% tax * 50% discount = $20k. There'd be a few things that will raise the cost base (agent fees, stamp duty, etc), but there's also depreciation deductions which will lower the cost base. If in 6 years I'm still staying with IPs, it'd be unlikely that I'd sell the property and buy another one. I can just revalue the property at that point start the CG clock, right ? (or move back in and reset the 6 year exemption clock).

    Trust structures looks very interesting to consider. But since it'd be a few years at least before I can start seeing the benefits, the complexity and costs of setting up one from the start is probably not worthwhile. Its much more worthwhile when you have lot of IPs though, but it'd be quite a long while yet until I get there.

    Since the value of FHOG doesn't seem to increase over time, its probably best
    to take advantage of it as early as possible.
     
  7. dave99

    dave99 Member

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    Perhaps the beneficiaries could hold on to the property too, and their children and so on down the line. No CGT ever! But if great-great grandson wants to sell 50 years later - wow that's a big CGT bill! :)

    - Dave99
     
  8. trajik

    trajik Member

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    what about buying in your name for 6 years as PPOR exemption, then setting up a trust and transferring to the trust.

    No CGT, only stamp duty, and you still have effective ownership
     
  9. carlau

    carlau Member

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    So what you setup a Trust account and sell the property and pay no CGT?
     
  10. alexlee

    alexlee Member

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    Not true. If they inherit from you, they get it at a cost base equal to the value as at the date of death. All capital gains racked up during your lifetime are in effect tax free. If you inherit from someone and sell immediately (at about the same value as at the time of death) CG is minimal. Beneficiaries only pay CGT on the CG that occurs between inheritence and THEIR death. During which they can use all the equity the previous person built up.

    True. My own experience (I'm 29 and it is now more than 6 years since I bought my first IP) as a young investor is that PRECISELY because things change you want to get some good assets under your belt early. Time is the investors friend and the younger you are, the more % of your salary you can save because you have fewer necessities. I've been working overseas for the last 6 years and I've also been investing in IPs. Now that I'm at the stage when I'm thinking about buying my own place, starting a family, etc (I'm staring down the gullet of 30) I'm REALLY glad I have those IPs.

    If you start a business requiring a lot of capital, wouldn't you prefer to have a lot of IPs happily appreciating to give you the capital you need? Many of my friends are wondering how they're going to get a deposit for their PPOR, and in the past they've asked me why I was putting myself on the hook for such big mortgages. I now have no concerns about getting together a deposit to buy my own PPOR AND continue investing.

    I got my figures wrong.

    Depreciation is deducted at your full marginal rate (say 40%) and you pay it back at half 20%, so you're ahead there. As you say, if you're going to stick with IPs after 6 years, you're unlikely to sell. In 6 years, if the CG is bad the CGT exemption rule doesn't help much. If it's good CG, believe me you're not going to give up IPs. If you hit anything LIKE the cycle we've had in the last 6 years (and I've only averaged 7-8% a year) you're going to be hooked.

    You could move back in, but you've said things change. I didn't want a house when I was 23 but I do now. Thinking 'I can always move back into it' limits your thinking to 'I'm only going to own one property'. Not the best attitude if you want to build a big portfolio.

    Two main benefits to trusts: asset protection and income streaming. While it's -ve geared you could get the same effect holding property in your own name, so there is no immediate benefit. Asset protection is more of an insurance policy: I may not claim insurance every year but I happily pay the premium because I want the protection.

    As for income streaming, if you get to the point where you use the benefit of, say, CG distribution to the lowest tax payer (when you sell), it's too late to change entities. You can't move ownership to a trust later without incurring stamp duty (based on the market value when you sell, which hopefully will be much higher than the cost now). Entity selection should be done FIRST.

    Re lots of IPs.... you'd be surprised. After your first couple of IPs (which will be very hard to accumulate) the CG really takes over and it jumps exponentially. If you build it diligently, you'll have lots of IPs before you know it. That's why IPs are so attractive: fairly safe leverage.
    Alex
     
  11. alexlee

    alexlee Member

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    You pay no CGT when selling your own PPOR, but the trust will have to pay stamp when buying it from you.

    Which begs the question: if you plan to keep the property anyway, why not just buy it in the trust in the first place? And if you plan to keep it, why transfer it to the trust? Asset protection is fine, but you can just gear the thing up to the hilt to decrease equity in your personal name.
    Alex
     
  12. trajik

    trajik Member

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    A couple of things, there is no CGT on inherited property if sold within 2 years of inheritance and the property was the deceased PPOR.

    The cost base for beneficiaries of a PPOR inheritance is either the market value at death if the property was originally purchased prior to early 1985, or original cost base if purchased after early 1985.

    Transferring the property to a trust would be beneficial to gain the CGT exemption, and then the new cost base would be the sale value, of course only if a trust hadn't been used originally.
     
  13. alexlee

    alexlee Member

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    That would imply if a PPOR was purchased after 1985 and is passed onto a beneficiary, then it would be far better to sell within 2 years than to hold onto it, since CGT exemption disappears after 2 years?
    Alex
     
  14. trajik

    trajik Member

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    Exactly,

    Even if you went and bought another property straight away after selling, the savings in CGT may be substantial, but stamp duty must be considered on the new property.
     
  15. GIDDO

    GIDDO travelling member

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    Bump

    :) Am I right in saying that an individual can claim a 50% discount on CGT on any sale of an investment property? (if purchased in an individuals name)

    And that same individual can claim a total exemption of CGT on their own PPOR?

    And if bought in a company name, the property is subject to CGT at 30% from the first dollar?

    Doesn' t the CGT exemption make it pretty attractive to own a PPOR that is going to appreciate nicely; keep it a few years and then go again??

    I don't mean that we should not have IPs as well; but I am asking whether people think a decent sort of PPOR, bought well, is a good idea, as long as you are prepared to swapp PPORs every 5 years or so??

    Can someone knowledgable confirm this please?:)

    Kind regards and happy new year to all from GIDDO:)
     
  16. geoffw

    geoffw Untitled

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    Giddo

    The 50% exemption for an IP is if you've held it for more than a year.

    There is a definite huge CGT advantage to owning your PPOR.

    But then, you can't offset interest and holding costs against your tax on a PPOR.

    That may or may not offset the CGT advantage.
     
  17. julia

    julia Member

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    The cost base does not reset at 2013. The cost base resets only once, when you move out in July 2007. From that point forward is just the period that is exempt from CGT as your PPOR so if you did not sell until July 2014 without moving back in 1/7th of the gain using the July 2007 cost base plus all the add ons, is taxable (section 118-192).

    This is only applicable if the house was the deceased residence at date of death or a pre 85 house (section 128-15). In this case you have up to two years to sell with not CGT (section 118-195). If it was not the deceased home and post 85 then inherits at the deceased cost base (section 128-15).
    You can’t use your PPR exemption if the property is held in a trust (section 118-110)

    Julia
    www.bantacs.com.au
     
  18. speedbump

    speedbump Member

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    In reference to 6 year rule I was under the impression that if you moved back in (for 2 years) the 6 years does not start again, however it is added on so you still have 6 years in total but over 8 year period.



    Speedbump
     
    Last edited: 1st Jan, 2007
  19. julia

    julia Member

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    Speedbump,

    Section 118-145 (2) .... You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence.

    Julia
    www.bantacs.com.au
     
  20. speedbump

    speedbump Member

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    Thanks Julia,

    That is the benefit of asking questions, you generally get an answer.

    Speedbump