defining your PPOR main residence for CGT

[mixedup]

I have a question re this: https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Real-estate/Treating-a-dwelling-as-your-main-residence-after-you-move-out/

So in the case you have had two properties of overlapping periods, for which you haven't rented either, and you have lived in both, it sounds like you can:

a) basically determine yourself at what point you want to define the PPOR swapping from one to the other, as long as over the course of your tax returns to ATO there is consistency in terms of only one can be your PPOR at any one time...do I have this correct?

b) in terms of calculating impact of CGT for say property 1 which was your PPOR for a portion of the overall period, it appears you just calculate the overall capital gains, and then apply the ratio of what portion of time your owned the property was it deemed to be your PPOR. So if you were there 2 out of 3 years, then applicable capital gains would then be only 1/3 of the figure you have calculated. Is this correct?

 

[Paul@PFI]

I have a question re this: https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Real-estate/Treating-a-dwelling-as-your-main-residence-after-you-move-out/

So in the case you have had two properties of overlapping periods, for which you haven't rented either, and you have lived in both, it sounds like you can:

a) basically determine yourself at what point you want to define the PPOR swapping from one to the other, as long as over the course of your tax returns to ATO there is consistency in terms of only one can be your PPOR at any one time...do I have this correct?

b) in terms of calculating impact of CGT for say property 1 which was your PPOR for a portion of the overall period, it appears you just calculate the overall capital gains, and then apply the ratio of what portion of time your owned the property was it deemed to be your PPOR. So if you were there 2 out of 3 years, then applicable capital gains would then be only 1/3 of the figure you have calculated. Is this correct?

a) Yes

b) Yes...

Also don't fall for the mistake of ignoring your partner too. Just because they don't own any of either property doesn't mean its 100% exempt based on you alone. The non-owner spouse also has to be involved.. Ditto if its same sex partners. Spouse no longer is concerned with a marital arrangement.

 

[yee3890]

Do not forget you have option of "six year rule".

 

[mixedup]

isn't that for when you've rented?

 

[Paul@PFI]

Do not forget you have option of "six year rule".

The six year rule is a specific rule which applies to a property that actually hasn't been a PPOR for the whole period but can still however satisfy the exemption during the absence. Its called the absence rule for a reason. It doesn't allow overlap.

The question posted concerns how a person can treat dual residences. This happens a fair bit. eg : Holiday homes, spouses each own a residence etc.

One other consideration for people in this case should also be land tax. Only ONE property can be the PPOR and each state has precise rules often far stricter than the tax rules. Its not unusual for wealthy families with a good holiday home (Palm Beach etc) to adopt the holiday home as their PPOR and to treat the residence as the one subject to land tax.

Mixedup - In your original post there is a small issue. You may not need to apportion. If the absence rules can be used OR the main residence exemption used then no apportionment needs to occur. This is an election. The way you treat the first property sold will determine the CGT outcomes for the other. This is important as if you do not satisfy all the main residence conditions then proportioning may be relevant as the exemption is lost. An example - Renting the property for say 6 months after it is acquired. This happens sometimes with FHOG applicants.

 

[mixedup]

Also don't fall for the mistake of ignoring your partner too.

thanks for this pointer. My reading of this (if I understand) is that if you're moving from a period of (a) wife owning PPOR1, then moving into (b) joint owned PPOR2, then you probably need to acknowledge PPOR2 property as both of your PPOR from the day you move in. That is if the option where the wife maintained the PPOR1 property as her PPOR for the entire time, then husband may miss out on 50% of the benefit of the PPOR2 property during the PPOR2 owned timeframe, if that makes sense. Although it talks about if the person with >50% ownership, and I'm not sure what happens in the case where there is an exact 50:50 split here?

Let me know if I need to explain this a bit better....

 

[Paul@PFI]

thanks for this pointer. My reading of this (if I understand) is that if you're moving from a period of (a) wife owning PPOR1, then moving into (b) joint owned PPOR2, then you probably need to acknowledge PPOR2 property as both of your PPOR from the day you move in. That is if the option where the wife maintained the PPOR1 property as her PPOR for the entire time, then husband may miss out on 50% of the benefit of the PPOR2 property during the PPOR2 owned timeframe, if that makes sense. Although it talks about if the person with >50% ownership, and I'm not sure what happens in the case where there is an exact 50:50 split here?

Let me know if I need to explain this a bit better....

Not quite but sort of. If both satisfy the MRE they can choose which uses the exemption. They individually and jointly must do this and they do this by using a method to calculate the CGT (if any) basis on sale of the first property.

Also remember that land tax interacts. Wife cant claim PPOR for a property she does not physically reside in but for land tax that can be imposed on her (if she lives in hubbys home). So its often case that CGT and land tax align. Land tax doesn't care if income is earned. A good example is the NSW PPOR exemption for land tax. Its contains a sting...The ONE residence per family rule. It ignores legal ownership in Clause 12 of the Ruling. http://www.osr.nsw.gov.au/info/legislation/rulings/land/lt082v2
OSR ignore % interests - They do allow the prop with the higher value to be exempt.

Its often a position of fact (you cant reside if you don't live there) and driven by other factors. Also its a practical issue. Most people try to claim max exemptions early (sale of first property rather than the property with the largest tax issue) and this defers any potential CGT to the other property. If its not sold its deferred and may never trigger.

 

[mixedup]

thanks - can I put forward a scenario to try to confirm in my own mind - so say...

* Timeline
2000 - Property A purchased
- in Wife's name
- both living
2005 - Property B purchased
- in joint names
- both living here
2010 - Sell Property A
* Assume Property A has great appreciation over time
* No rental or income produced by the properties at any stage
* Property A in NSW, Property B in QLD

Question: What would optimal choice for PPOR for wife be for the 2010 tax year?

Initially I would have thought she should maintain Property A as the PPOR through the entire period (from 2000 to 2010) as it will have greater growth, so better to nominate it.

However with the rules re partners would the best approach be in fact for wife to nominate Property A for 2000-2005, and Property B for 2005-2010, to ensure it does not trigger the husband to lose the 50% CGT benefit himself (in the future if Property B is sold - maybe assume Property B would be sold in 2011 or something) for Property B capital gains PPOR ruling between 2005 and 2010?

 

[Paul@PFI]

1. The 6 year MRE is not applicable in this circumstance to cover the period 2005-2010. However a election may be made to treat A as the MR for that period provided that there is no MR claim during the same period (2005-2010) on property B by the same owner. The MR exemption can be split be two owners across separate properties.
ie B is now subject to CGT for the period 2005-2010 for the 50% wife interest and hubby's 50% interest is subject to the MR exemption.

2. Land tax on A during the period 2005-2010 ? No exemption as it was not the physical residence. That is fact based. When selling A land tax clearance cert would identify this. If landowner (wife) exceeds threshold then land is taxable and assessment payable. Unreg - 4 years arrears max.

3. B would not be subject to QLD land tax as it was a physical residence.

Wife is obliged to treat B as PPOR for QLD / NSW land tax rules 2005-2010 as it is a issue of fact. There can be uncertainty where its a holiday home in same state but not if its a home interstate. Land tax has a test of residency.

So in this case CGT allows A to be exempt 2005-2010 but land tax is not. The CGT exemption arises as A was a main residence as soon as practicable after acquisition and through to 2005. However it applies only to the legal owner. So her share of B is then subject to CGT for any period of overlap....That proportioned gain is subject to CGT discount.

The delay in lodging a 2010/11 return poses a matter of concern if an election is being made. If a return was lodged it may be too late to amend too.

 

[mixedup]

thanks Paul. Just checking though. You spoke of CGT & land tax choices (or lack of choice) re the PPOR to be used for the period, however is it allowed to nominate a separate PPOR for CGT as for Land Tax? i.e. in the scenario above Property B has to be the PPOR for wife from the Land Tax point of view for the 2005-2010 period, however is she still allowed to nominate Property A as PPOR from a CGT point of view for the same period?

 

[Paul@PFI]

thanks Paul. Just checking though. You spoke of CGT & land tax choices (or lack of choice) re the PPOR to be used for the period, however is it allowed to nominate a separate PPOR for CGT as for Land Tax? i.e. in the scenario above Property B has to be the PPOR for wife from the Land Tax point of view for the 2005-2010 period, however is she still allowed to nominate Property A as PPOR from a CGT point of view for the same period?

State land tax rules use different conditions and are independent of Commonwealth Tax law. Sometimes they do meet. For example a CGT event can also trigger stamp duty. (Stamp duty rules adopt the view that some CGT events are a trigger point). So it gets further complicated by making all three taxes a problem when dealing with property.

Also there is an absolute test of residency within land tax subject to some concessions. State land tax rules can be onerous. For example if its vacant land you cant reside unless another concession allows it (ie to build a residence). CGT rules allow land attached to land you reside upon to be vacant and all of it forms the exempt land (ie the tennis court) BUT CGT rules limit CGT to 2 hectares. Land tax doesn't - ie farming land. But land tax requires it to be predominantly used for farming to be exempt. There is a NSW 6yr land tax rule which is often badly understood and some think its a mirror to the 6yr CGT rule but its far from that.

Each is a distinct tax covered by different law. Land tax is state law to which means each state has very different land tax laws. The most simple rule across all states is that your own residence is not subject to land tax.

One of the important reasons to use a property tax specialist. This can enable strategies to minimise tax legally or identify a concern in advance.

 

[beachgurl]

This info is great but a little over my head.

I sold two properties last year. I moved into each of them at settlement (first one still fell under the 6 year rule). I nominated one as my PPR and the other to be charged CGT. Do I need to nominate them identically for land tax purposes? I moved out of the first to move into the second and nominated the first as the CGT exempt. Can I nominate the second as PPR for land tax calculation?

 

[Paul@PFI]

http://www.osr.nsw.gov.au/info/legislation/rulings/land/lt082v2

For land tax you cannot "nominate" land. Its a fact based outcome in most instances. If both are taxable / PPOR use then you can nominate the higher value IP. (ie Home + Beach House)

CGT allows a choice. Land tax may not.