CGT on PPOR that was rented

Hello,

When I bought my home (last year) it came with tennants, so we rented it out for the first 6 months of ownership before moving in. So when it comes time to sell the PPOR, how is the CGT calculated. One friend told me that it's based on the gain between when we bought our flat to when we finally stopped renting it and moved in. Therefore, if we had been smart and got a valuation of our home as soon as we moved in that showed there was no gain in value since we bought it, then we would never have to pay CGT. My friend told me this was a change in the tax law.

However, I spoke to an accountant the other day (who I personally think isn't very up to date with the latest changes in tax law and therefore I'm questioning what he said). He told us that this wasn't the case, and that the CGT would be

(number of days rented)/ (no. of days owned) * (taxable gain)

Which one is correct???

Cheers

John
 
Hi Dale,

Thanks for that. I actually didn't get a valuation done once we moved into the flat. So in that case, what happens now? I mean, how do we work out the value of the flat upon ceasing renting it out?

In a way I'm a little annoyed it's the way my friend described since I don't understand how to calculate the CGT that way. I've got a copy of "Home Buyer's Guide", 2001 ed. by Nicholas humphrey. In it, he does a calculation for CGT as per the way the accountant told me, so I understand how to do it that way.

John
 
Hi again

You can pay a valuer to give you a valuation as at a certain date.

As for the CGT calculation . . . you could leave that to the bean counters :) or, you will apply something like:

Purchase price, plus costs of buying minus the value at the date it became your PPOR. The difference is the notional gain and if you owned the property for more than 12 months, you can divide the gain by half as one half is exempt from tax.

Have I just confused you? Sorry

Dale
 
Hi Dale,

No, I'm not confused. That makes sense.

I didn't know you could get a valuation done for the value of a property in the past. Is it better to get it done now, or it doesn't really matter when we get it done as it's all retrospective anyway now???

I just read Nicholas Humphrey's book a little more closely. He actually does say that if your PPOR is 1st used for income-producing purposes after 20 Aug, 1996 "CGT will be calculated based on the gain or loss over the actual period the house was used for income-producing purposes, not a pro-rata of the total gain over the period of ownership". However, just 3 pagges later he proceeds to give an example of calculating CGT for such a situation using the pro-rata method. Strange.

Thanks again Dale

John
 
John,

The anomoly between what is being said in the book your reading and the example provided can probably be put down to the fact that the mkt value rules apply only when the property was your PPOR from the date you purchased it and only subsequently becomes a rental property. The market value rules won't apply in the converse situation when a property was initially a rental property from time of purchase and then becomes your PPOR at a subsequent time.

In the former situation the cap gain is calculated as Dale has outlined previously. However, in the latter scenario the cap gain will be calculated on the difference between the the ultimate selling price less original purchase price (incl. purch & selling costs), which will then be pro-rated for the period it was a rental property.
 
Hello,

Sorry. I'm a little confused now. Is this correct for my situation then.....since the property came with tennants, then essentially it was a rental property at the time of purchase, not a PPOR. Then, 6 months later when we finally moved in it became our PPOR. Therefore, the CGT is calculated as a pro-rata of the CG for the time it was a rental property.

It's just I read what I've quoted in the book to say the opposite...ie, that if you first use your PPOR for income producing purposes from the date of purchase, then the "market value" method of calculating CGT applies (as Dale described above), not the "pro-rata method".

Cheers

John
 
HI John

It just occured to me that you should not have to pay CGT at all on thsi property if you moved in within 6 month sof buying it. This is because there is a section of the law that allows for a "change over" period of 6 months where you can effectively have 2 PPOR's and still pay no CGT.

Does this help?

Dale
 
Hi Dale,

What would happen if you purchased your first home (i.e. had no other PPOR) and it was leased out for the first six months - would CGT then apply?

Thanks,
TOD
 
Originally posted by tenofdiamonds
Hi Dale,

What would happen if you purchased your first home (i.e. had no other PPOR) and it was leased out for the first six months - would CGT then apply?

Thanks,
TOD

Hi

Technically, yes, it does apply. However, you can elect to have the property treated as your PPOR for that time and so it will be exempt from tax.

Dale
 
Hi John,

That's a formidable brain trust to hold an opposing view with. Nevertheless after reviewing the relevant legislation I can't find any reason to alter the interpretation set out in my earlier post. However, that's not say that I couldn't be persuaded by an alternative view given the opportunity (it wouldn't be the first time I've done that when interpreting tax legislation!)

At the risk of searching for some common ground where there may be none, is it possible that the content of the text your reading is sufficiently clear to avoid any ambiguity in the reader's mind on this particular issue?
 
Hi everyone,

thanks for your replies.

Dale...We actually rented our flat first for about 6 months and 10 days. Bit of a bummer.

Richard....I've re-read Nicholas Humphrey's book. It just makes me more confused as he seems to contradict himself. ie, as I wrote previously, he states that if you first use your PPOR for income-producing purposes after 20 Aug, 1996 CGT will be calculated based on the market value method. But then he goes on to give an example of someone buying a property in Jan 2000, first renting it out and then moving into it as her PPOR. In this example, he uses the pro-rata method to calculate CGT. Quite contradictory to his first explaination.

I asked my accountant today if he knew the answer when I went to do my tax return. He didn't have a clue. I think I'll get a new accountant.

CHeers

John
 
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