CGT Question

[Brett IP]

Good Morning

Just a quick question in regards to CGT. Im quite sure I know the answer but just checking.

We bought an IP 18 months ago which has gone up considerably in value & has been rented the whole time, since day 1. In that time, our PPOR value has not moved. We will be selling the PPOR in 1 years time if we can get enough for it, and move into the current IP, which will then be the main residence from that time.

Now usually you can nominate a main residence providing you lived there first.

So from my understanding, I cant sell the PPOR and nominate that for CGT (which would be $0 in that time) can I, because the other house was a rental from day 1?

 

[bene313]

Correct - you must have lived in the IP at some stage for the 6 year rule to apply.

 

[neK]

Correct - you must have lived in the IP at some stage for the 6 year rule to apply.

You need to have lived in the IP from the date of acquisition for the 6 year rule to apply.

So if you bought it, used it as an IP then moved in as a PPR, then the 6 rule does NOT apply. CGT will be payable on a pro-rated basis.

 

[marg4000]

You will sell your PPOR CGT free.

You will then move into your IP.

When you eventually sell, the gain will be calculated on the percentage of time you lived there as your PPOR - i.e., if you have rented for 5 years then move in and make it your PPOR, you will be assessed for CGT on 50% of the gain (after allowing for the 50% discount for holding for longer than 12 months).

You won't have to pay any CGT until you sell the property.

Capital gains in any property tend to be chunky - i.e., a large gain in a short time, then a few years of little or slow growth. The longer your make this IP your PPOR the more you dilute the gain in the last 18 months.
Marg

 

[Brett IP]

Thanks everyone, I thought this was the case.

We certainly plan to be living there a very long time so CGT shouldnt amount to too much, thats if we ever sell. It needs a lot of work but has an excellent starting base - 4 bed house, acreage, pool, massive shed. Everything we want, just needs renovating/refreshing. Cant wait to get in there.

 

[Jebb]

You need to have lived in the IP from the date of acquisition for the 6 year rule to apply.

So if you bought it, used it as an IP then moved in as a PPR, then the 6 rule does NOT apply. CGT will be payable on a pro-rated basis.

6year rule is completely separate in this case, is it not?

Even if it was an IP first, then you lived in it as PPOR, and then moved overseas etc, you can still claim it as your PPOR for up to 6 years. You just have to pay CGT on the portion it was an IP, rather than the whole lot being CGT-free, when it comes time to sell.

Correct me if I'm wrong.

 

[marg4000]

To claim the 6 year rule you must have first had the property as your PPOR. As this was rented from purchase the 6 year rule cannot apply.
Marg

 

[marg4000]

Thanks everyone, I thought this was the case.

We certainly plan to be living there a very long time so CGT shouldnt amount to too much, thats if we ever sell. It needs a lot of work but has an excellent starting base - 4 bed house, acreage, pool, massive shed. Everything we want, just needs renovating/refreshing. Cant wait to get in there.

OK, now you need to get serious.

Once you move in, start a spreadsheet and detail every improvement you make to the property. This will all be added to the cost base and therefore reduce the capital gain when you come to sell.

I suggest you have a meeting with your accountant to see what things you can legitimately take into account.
Marg

 

[neK]

6year rule is completely separate in this case, is it not?

Even if it was an IP first, then you lived in it as PPOR, and then moved overseas etc, you can still claim it as your PPOR for up to 6 years. You just have to pay CGT on the portion it was an IP, rather than the whole lot being CGT-free, when it comes time to sell.

Correct me if I'm wrong.

Im pretty certain it must be a PPR from when you bought it for the 6 year rule to apply.

http://www.ato.gov.au/corporate/content.asp?doc=/content/86191.htm

It makes no mention about the circumstance you refer to, but then again thats just typical of the ATO. The more vague they are the bigger chance they catch you out on Part IVA if they want to.

To qualify for a full CGT exemption, the property must have been your main residence from when you acquired it. If you move out of the property and rent it out, you can continue to claim an exemption from CGT for up to six years after you move out. If you do not rent it out, you can claim a CGT exemption for it for an indefinite period after you move out.

 

[Brett IP]

Once you move in, start a spreadsheet and detail every improvement you make to the property. This will all be added to the cost base and therefore reduce the capital gain when you come to sell.
Marg

Thanks Marg

We have already done a few things, we have replaced the oven with a really good one (knowing we will move there), replaced the fans, the toilet and added air con. I have detailed every cost & improvement so far & will continue to do so once we move in. Current tenats are great too.

Hopefully we live there for 10+ years so the CGT is next to nothing (2.5 years rental, 10 year PPOR = 20% CGT * 50% discount = 10% * current tax rate = 3.15% of profit), after all, if we do most of the work ourselves, we want to be rewarded for it, not reward the ATO.

In saying that, the tenant believes they will move on from next February so we were considering borrowing $20k against it, keeping it off the market for 2 weeks & having 2 weeks off work, re tile it, fix some plaster, re paint the whole house & the pool plus tidy up the yard & house here and there. THis would be a good idea I feel because we can claim the interest on the renovations as well as depreciate some of it before we move in. We would add new tenants for just 12 months & most likely get $50 a week more for the place also.

 

[Marty McDonald]

You should get it valued (ask for a conservative estimate) when you move in so that CGT is only applicable on the increase in value up to that date and as mentioned load up on any capital oulays before its the PPR to increase your cost base.

 

[Brett IP]

Hi Marty

I would think that doing all the capital work before moving in would increase the value by more than what we spend on it, when it comes to a valuation, hence having a detrimental effect on the calculation for CGT.

I would get it valued, however it has increased a lot, by about $150k in the very short time weve owned it. We grabbed it at a bargain basement price (desperate sale), basically for the value of the land, its flat acreage. Im quite certain that getting it valued wouldnt help later down the track for CGT, however I guess it cant hurt. May work in our favour.

Cheers

 

[Marty McDonald]

Hi Brett,

Yes I see your point doing work on it before valuation would be counter constructive. Doh! Perhaps get it valued just before you do the work but before it becomes your PPR? Having a valuation on file may be to your advanatge down the track as yiou said depending on how the numbers unfold.

 

[Hillview]

Re main residence and 6 year rule

Hi Brett,

The other one to watch with this is main residence exemption only applies to a certain amount of area, so if it was more than 2hectares, you may also have a problem.

 

[kathryn d]

You should get it valued (ask for a conservative estimate) when you move in so that CGT is only applicable on the increase in value up to that date and as mentioned load up on any capital oulays before its the PPR to increase your cost base.

That is what I believe also.
Posters, in other threads have tried to dissuade me otherwise..didn't work

 

[Brett IP]

Hi Brett,

The other one to watch with this is main residence exemption only applies to a certain amount of area, so if it was more than 2hectares, you may also have a problem.

Thanks. The land is only 1.5 acres, thats enough mowing for me

 

[JamesGG]

That is what I believe also.
Posters, in other threads have tried to dissuade me otherwise..didn't work

Yeah, I can understand that. I mean hey, a few people (one of whom being qualified in the area, I believe) offer an opinion based on quoted legislation and the Tax Office Guide to Capital Gains Tax. But surely, none of that is relevant and we can use poorly constructed logic to pay less tax, instead ??

 

[kathryn d]

Yeah, I can understand that. I mean hey, a few people (one of whom being qualified in the area, I believe) offer an opinion based on quoted legislation and the Tax Office Guide to Capital Gains Tax. But surely, none of that is relevant and we can use poorly constructed logic to pay less tax, instead ??

Exactly...
I'm not the one writing the rules, that can be a bit vague, that can leave room for interpretation.
All you need to show is how that rule doesn't quite apply to you in this circumstance, and the reason why...
Why else do you think there is an appeals section?
You can also ask the ATO for a Private Ruling.