CGT start date

Hi all,

I figure the easiest way to ask my question is with a scenario.

a) Bob buys a property for $200k (with a loan of $160k)
b) Bob lives in it for 2 years then moves out and moves in with a mate. When moving out he refinances his loans from P+I to IO and also gets a LOC for any spare equity (for a rainy day). During this process the bank tells him they've revalued his property at $240k so will lend up to $192k with no LMI.
c) 8 years later Bob sells the property for $600k

What would be Bob's capital gain for tax purposes in this scenario?

If, 6 years after moving out, he has the property valued at $500k, would this change the situation?

I guess the crux of my question is, if a person moves out of a PPOR and does not sell within 6 years, is the CG taken from when they move out or the 6 year mark? If the first case, then could the bank valuation be used as 'evidence' to the ATO that the price had gone up and therefore reduce the CGT? If not, can valuers backdate valuations?

Thanks for any help.
poyner
 
If he moves in with his mate and still classifies the property as his PPOR, he will not have to pay CGT. :)
 
From the ATO Guide to CGT 2007:
ATO p67 said:
If a dwelling was not your main residence for the whole time you owned it, some special rules may entitle you to a full exemption or to extend the partial exemption you would otherwise get. These rules can be applied to land or a dwelling if you:
  • choose to treat the dwelling as your main residence even though you no longer live in it
  • moved into the dwelling as soon as practicable after its purchase
  • are changing main residences...
ATO p74 said:
In some cases you can choose to treat a dwelling as your main residence even though you no longer live in it. You cannot make this choice for a period before a dwelling first becomes your main residence.

If you rent out the home for more than six years, the "home first used to produce income" rule may apply, which means you are taken to have acquired the dwelling at its market value at the first time you used it to produce income.
If Bob rented with his mate (did not purchase another PPoR) AND it was less than six years from the time the place produced income to when he sold it, then the CGT payable will be nil.

If however, it was longer than six years, he the becomes liable for CGT. This would be 600-240= 360, less 50% = CGT payable on $180K. This would be added to Bob's income in the year of sale. If Bob, for example, was in the 30% tax bracket there would be $54k CGT payable.

If Bob moved into the residence before the six year period and then rented it out again, this would eliminate CGT.

Note also than when Bob refinances the loan, only the $160k (or whatever was left on the loan) will be tax deductible... It is the purpose of this loan which counts, not the new LOC.

My opinion only; I am not an accountant... seek independant advice.
 
I dont entirely agree (but then again, I'm not an accountant either).

I think the CG would be
$600k - $200k = $400k.

The property was rented for 6 of the 8 years, so 75% of the time.

Therefore the taxable gain would be $400k x 0.75 = $300k. And then apply the 50% discount, so $150k.

I dont believe the bank valuation is valid. My understanding is simply a division of the total gain by the amount it was a rental property.
 
From the ATO Guide to CGT 2007:If Bob rented with his mate (did not purchase another PPoR) AND it was less than six years from the time the place produced income to when he sold it, then the CGT payable will be nil.
Yeah pretty sure I understand this bit
If however, it was longer than six years, he the becomes liable for CGT. This would be 600-240= 360, less 50% = CGT payable on $180K. This would be added to Bob's income in the year of sale. If Bob, for example, was in the 30% tax bracket there would be $54k CGT payable.
so you believe that the valuation of 240 from the bank would be admissable to the ATO as evidence even though bob doesn't have anything in writing? If it's not, and bob doesn't have a valuation report, is he forced to use the original price of $200k or can he make another 'informed estimate' of what the price would have been when he moved out?
 
I dont entirely agree (but then again, I'm not an accountant either).

I think the CG would be
$600k - $200k = $400k.

The property was rented for 6 of the 8 years, so 75% of the time.

Therefore the taxable gain would be $400k x 0.75 = $300k. And then apply the 50% discount, so $150k.

I dont believe the bank valuation is valid. My understanding is simply a division of the total gain by the amount it was a rental property.

Hmmmmm interesting take on it...... The ATO website does say (thanks yo yo ma)
If you rent out the home for more than six years, the "home first used to produce income" rule may apply, which means you are taken to have acquired the dwelling at its market value at the first time you used it to produce income.
which suggests that the correct value to use would be in the vicinity of $240k. But the ATO website doesn't seem to provide any guidance on determining the market value at the first time you used it to produce income
 
As I read it, you missed the good news.

You can apply the 6 year absence rule (if rented out after Aug 20th 1996) AND s.118-192 market value uplift SIMULTANEOUSLY.

i.e. If absent for more than 6 years before selling, then you use the market value at the 6 year expiry date - NOT the date of vacating - it is not retrospective.

You still get the MR exemption for the initial 6 years it was rented.

Cheers,

Rob
 
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