confused about capital gains on PPOR

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From: Shelly R


Hi again and thanks guys for responding to my post "should I sell?".

My accountant is insisting that the minute
your property ceases to be your PPOR you will
pay capital gains tax when you sell.

I ran by with my accountant what Dale mentioned.If you sell before 6years you do not pay capital gains.
My accountant does not agree with this law.
He also said the valuation on leaving your PPOR has no relevance as people were getting
their properties valued high so the difference
was less.
He seems to think the taxation office has put a stop to this?
Don't get me wrong.My accountant may well
not be up with the latest tax laws as he has
no personal experience with investment properties.
Thanks in advance,
Cheers Tony
 
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Reply: 1
From: Silver Ghost


If your accountant has no investment properties of his own, change to one that has.
 
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Reply: 1.1
From: Robert Forward


Hi Shelley

I agree here with Silver Ghost.

Your accountant doesn't have any IP's but Dale sure does. And I do know from my own accountant that what Dales has said is correct.

No offence to your accountant, but you need a knew one that doesn't have his head stuck in the sand.

Cheers,
Robert

Get your Property Inspection Reports @
http://www.CreativeFinance.com.au
 
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Reply: 2
From: Mark Petterwood


Hi Shelly,

I ran this query by my accountant who has seen it many times.

Points to remember.

You can only claim one property at a time as your MPOR.

You can only claim your IP as your MPOR for 6 years.

While you claim your IP as your MPOR your actual home will be racking years where it will be subject to Capital Gains.

When you sell the formula is:

(Years as Not MPOR/Years as MPOR) * Net profit

(50% concession on net profit if held for more than 1 year may come into play)

You need to setup your structure correctly before just doing this.

Remember if you have poor foundations the higher you go the greater chance of crashing down.

I also agree with the others - Get an accountant who deals with this stuff all the time and is not guessing.


Regards



Mark
 
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Reply: 3
From: Dale Gatherum-Goss


Hi Shelley

At the risk of causing you a headache . . . may I respectfully suggest that you ask your accountant to consider S. 118-145 of the 1997 ITAA. This section covers the 6 year rule where your former house, or PPOR, may be exempt from CGT when it is rented and you sell it within 6 years of you moving out.

Also, you might like to mention S.118-192 which deals with a PPOR bought before 19 Sept 1985 and became income producing after 20 Aug 1996.

When you do, step backwards quickly as most accountants (including myself ;-))) do not like to be questioned and proved wrong.

Good luck and I'll keep my fingers crossed for you

Dale
 
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Reply: 3.1
From: Marina .


On 6/4/02 11:19:00 AM, Dale Gatherum-Goss wrote:
>Hi Shelley
>
>At the risk of causing you a
>headache . . . may I
>respectfully suggest that you
>ask your accountant to
>consider S. 118-145 of the
>1997 ITAA. This section
>covers the 6 year rule where
>your former house, or PPOR,
>may be exempt from CGT when it
>is rented and you sell it
>within 6 years of you moving
>out.

Dale, does that mean that I can rent out my PPOR for up to 6 years, and as long as I sell it within 6 years of us moving out, I will pay no capital gains tax.

Apologies if I am not understanding this correctly.

I will just quickly explain my situation.
We have our PPOR which we bought in 1992, and would like to upgrade to a newer home.
We do not wish to sell this house yet, as we would like to see more capital growth before we sell.
We would like to rent out this house for say 6 years, and then sell it.
So again I ask is my understanding of this correct. When I sell this in 6 years time, it will be capital gains tax free, or I will need to pro-rata it from the day it became an IP.

Thanks.







>
>
 
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Reply: 3.1.1
From: Dale Gatherum-Goss


Hi

That is correct.

However, you may like to keep in mind the fact that you lose part of the CGT exemption on your new PPOR for the time that you claim the old one still.

It's a tough call.

Remember though, when you move out of the old house - obtain a valuation for it.

Good luck

Dale
 
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Reply: 3.1.1.1
From: A Jones


I had to convince my accountant that I would receive the benefit of the PPOR exemption for a further 6 years from February 1999(in the situation where I lived in my PPOR from date of purchase, July 1993 till April 1996, and again from January 1998 till February 1999 and have let the property out at all other times). I own no other properties.

There are two Tax Determinations that deal with this TD95/8
http://law.ato.gov.au/atolaw/view.htm?basic=+TD%2095/8&&docid=TXD/TD958/NAT/ATO/00001

and TD95/9
http://law.ato.gov.au/atolaw/view.htm?basic=+95/9&&docid=TXD/TD959/NAT/ATO/00001

which i faxed to my accountant. I trust that these Taxation Determinations have not been superceded.

Ajax
 
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Reply: 3.1.1.2
From: Marina .


On 6/4/02 5:11:00 PM, Dale Gatherum-Goss wrote:
>Hi
>
>That is correct.
>
>However, you may like to keep
>in mind the fact that you lose
>part of the CGT exemption on
>your new PPOR for the time
>that you claim the old one
>still.

If I plan not to sell the new PPOR, then I should be safe. Is that correct?


>>Remember though, when you move
>out of the old house - obtain
>a valuation for it.

Could you just explain this above point. I am not quite sure how the valuation fits in.
Is the valuation only useful if you sell the New PPOR?
How would the valuation affect the overall picture? What do you do with the valuation?


Thanks Heaps
>
>
>
>
 
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Reply: 3.1.1.3
From: Mike .


Just read this thread and can't believe how everybody has muddied the waters. No one has mentioned the fact that when Tony buys a new place and moves into it, then the new place becomes the principal residence.

Now Tony has two options:

1) Quickly sell the old place so that he can paydown the loan on the new place, or

2) Keep the old place as an IP.

If Tony chooses option 1) then a special rule applies which says:

If you acquire a new home before you dispose of your old one, both dwellings are treated as your main residence for up to 6 months if:


° the old dwelling was your main residence for a continuous period of at least 3 months in the 12 months before you disposed of it


° you did not use it to produce assessable income in any part of that 12 months when it was not your main residence


° the new dwelling becomes your main residence.


If you dispose of the old dwelling within 6 months of acquiring the new one, both dwellings are exempt for the whole period between when you acquire the new one and dispose of the old one.


If Tony chooses option 2) when he eventually sells the old place the period in which it was his principal residence is exempt from CGT...the period that it was an IP (producing income) will incur CGT.

As for the so-called 6 year rule...this only applies if you rent instead of buying a new home. I'm in this position where I kept my home and rented it while I am overseas in UK where I am renting. If I return to Oz within 6 years and live in my home again then I pay no CGT whatsoever when I sell my home.

Tony, dump your accountant but don't take on Dale until he's done a refresher course. LOL

For further reading go to Guide to capital gains tax 2002. Page 48 & 49 of Part A has some examples.

http://www.ato.gov.au/content.asp?doc=/content/individuals/22313.htm

Regards, Mike
 
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Reply: 3.1.1.2.1
From: Dale Gatherum-Goss


Hi Rusty


>If I plan not to sell the new PPOR, then
>I should be safe. Is that correct?

Yes, it is.

>>>Remember though, when you move
>>out of the old house - obtain
>>a valuation for it.
>
>Could you just explain this above point.
>I am not quite sure how the valuation
>fits in.
>Is the valuation only useful if you sell
>the New PPOR?
>How would the valuation affect the
>overall picture? What do you do with the
>valuation?

No, sorry, perhaps I was not entirely clear. The valuation relates to the old PPOR that is now an income producing asset.
When you sell that old PPOR, you will have a CGT event and the "deemed" cost of the house for CGT purposes will be the market valuation.

I hope that this helps.

Dale
 
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Reply: 3.1.1.3.1
From: Dale Gatherum-Goss


Hi Mike

>Just read this thread and
>can't believe how everybody
>has muddied the waters. No one
>has mentioned the fact that
>when Tony buys a new place and
>moves into it, then the new
>place becomes the principal
>residence.

Mike, this topic followed on from another topic where Tony's facts were already identified in that he has built the new house already. CGT and other issues were started there.


>As for the so-called 6 year
>rule...this only applies if
>you rent instead of buying a
>new home.

Mike, I disagree. What you suggest is the norm perhaps, but not the only situation. You may still elect to use the property as your PPOR . . . and take advantage of the 6 year exemption.

>Tony, dump your accountant but
>don't take on Dale until he's
>done a refresher course. LOL

I'm offended - I gave fair warning too in my earlier post abt accountants not liking being questioned.

Dale
 
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Reply: 3.1.1.3.1.1
From: Mike .


Hi Dale,

Earlier, I said: As for the so-called 6 year rule...this only applies if you rent instead of buying a new home.

In response, you said: Mike, I disagree. What you suggest is the norm perhaps, but not the only situation. You may still elect to use the property as your PPOR . . . and take advantage of the 6 year exemption.

After further research, I see I was wrong and you were right. So I unreservedly apologize.

Like Tony's accountant I assumed that he would have no need to elect the old unit as his PPOR. I feel the water was muddied when you said:

If he sells after the 6 years expires he will pay CGT on the gain. This is calculated as sale price less costs of sale less market value at the time the property ceased to be the PPOR.

You said this without indicating that this scenario is only true if the unit is nominated as the PPOR and not his new home.

Furthermore, Tony said: I ran by with my accountant what Dale mentioned. If you sell before 6 years you do not pay capital gains. My accountant does not agree with this law.

Clearly, Tony's accountant also presumed that the new house would be the PPOR and any delay over six month to sell the unit would incur some CGT.
<p>
Also Luke said:
<p>
2. If he did sell, say after three years, is it also possible to simply apportion 3/10 of the capital increase as requiring tax to be paid. (7 years PPOR status, 3 years not)
<p>
He is right if the new home is the PPOR and is wrong if the old unit is the PPOR.
<p>

The other thread which started this is: Should I sell? http://bne003w.server-web.com/~wb013/read?45289,30e#45289

Regards, Mike
 
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