CGT on PPOR if converting to a rental - strategies?

Hi,

Wife and I just purchased our first unit, will be living in as our PPOR, settlement around one month away.

I believe I have heard that if you live in as a PPOR for minimum 6 months, then convert to a rental property (and go rent yourself somewhere else), then you can still pay 0% on CGT on your property for 5 or 6 years.

1) Is this correct?
2) What are the advantages of such a strategy?
3) I assume that obviously you can't claim a deduction in the case the rent doesn't cover the interest - or you could but you would lose the PPOR CGT exemption?
4) What are the disadvantages of such a strategy?
5) What alternatives would anyone suggest?

Thanks alot for your help.

SYDB
 
P.S. If it makes a difference, we are IO with offset to maintain tax deductibility in case converting to an IP in future (thanks to advice received on this site).

I see the property as a good rental property in the future due to location and bought it with that in mind rather than trying to purchase my "dream apartment", if that makes sense.
 
1)yes
2)dont pay CGT
3) wrong assumption, check with your accountant, but Im of the opinion you can claim the deduction
4) you have to sell the property, some people think you should never sell, you have to rent somewhere else, or buy again, and you cant 'sit' on 2 CGT exemptions at once.....
5) cash in the bank? Sharemarket? hmm...

Also, 6 months is not quite correct. Some State revenue offices have minimum periods in which to claim the FHOG, this is diferent to claiming the CGT exemption. You only have to prove it was you PPOR, something reasonable or some such, no set time period.
 
Capital Gains

A special rule applies when you move out if a property you purchased after the 20/8/1996 and commence to use it as a rental. The cost base of the property is reset to the market value of the property at the time you move out (s 118-196) so you will need to get a real estate agent to give you the value of the property at that time should you ever sell it. Please note that this reset only occurs once during your time of owning the property, and it occurs at the time the property is first used to produce income (ie first rented out). If the house was purchased before this date, the cost base is still what it was previously but the taxable gain is apportioned by the days it was held privately vs rented out.

Another interesting rule is the 6 year leave of absence rule. One you leave the property, you can choose to have it remain your place of residence (making the house tax free on sale) for another six years if you continue to rent it out, or indefinitely should you just let it sit. The only proviso is that another house cannot be considered to be your place of residence during this time. You do not need to make a final decision on which house will be your place of residence until you sell one of them. You can move back within the 6 years, make the house your place of residence again, move out and a brand new 6 year leave of absence rule can apply.

This rule is useful for people who move out to rent or move back home to their parents as they are not living anywhere that they own so they can keep the extension going. It is also useful for people going overseas and intend to rent out their house while they are away.

Also note that you should capital gains apply to selling your house, if the house was purchased after 20/8/1991, you can add to the cost base of the property expenses you have not claimed as a deduction, even expenses that were incurred when the house was used privately. You cannot use costs incurred to increase the cost base if the costs were incurred before the house was reset to market value.

Of course capital gains does not apply to properties purchased before 20/9/1985 unless they are substantially renovated.

A typical misconception held by many investors is that if you move into a rental prior to selling it, it will be tax free on sale. This is incorrect. Once a house is not covered by a principal place of residence exemption, there will always be a capital gains tax liability if the property is sold.

Negative Gearing
When the house is rented out, you are able to claim a deduction if the deductible expenses exceed the income.
 
Just check with the requirements to claim PPOR stamp duty reductions. There is a length of time you have to reside in the property otherwise you will have to pay investor SD.
Marg
 
Hi,

Wife and I just purchased our first unit, will be living in as our PPOR, settlement around one month away.

I believe I have heard that if you live in as a PPOR for minimum 6 months, then convert to a rental property (and go rent yourself somewhere else), then you can still pay 0% on CGT on your property for 5 or 6 years.

1) Is this correct?
2) What are the advantages of such a strategy?
3) I assume that obviously you can't claim a deduction in the case the rent doesn't cover the interest - or you could but you would lose the PPOR CGT exemption?
4) What are the disadvantages of such a strategy?
5) What alternatives would anyone suggest?

Thanks alot for your help.

SYDB

I don't believe that there is a minimum time frame to occupy the home to make it your PPOR for CGT purposes.

Can anyone correct me?
 
The question of whether a property is a PPOR or not is a question of fact, not a question of time.

A person can move into a house for 2 weeks and it can be considered their PPOR, whilst a person can claim to live in a place for 2 years and fail the test. Electoral roll, connecting utilities, where mail goes, where you sleep and where the family sleeps are all factors in determining if the property is a PPOR.

Sounds messy since there are no clear solid guidelines, but at least its clearer than the tax residency tests.
 
Just from above Mry wrote:


"When the house is rented out, you are able to claim a deduction if the deductible expenses exceed the income."

say you rented your PPOR and the rental income is more than the deductible expenses ie interest, rates, renovations etc can you still claim the deductions? as technically we have to claim the rental income.

Cheers
 
How does the PPoR rule work if you bought the place as an IP but then move into it later as a PPoR?? If we now move out and rent it, can we use the 6 year exemption? Or is It disqualified from the PPoR exemption this since we originally bought it as an IP?
 
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