Do i need a Re-val when converting PPOR to IP?

[Jake D]

http://www.somersoft.com/forums/showthread.php?t=76870

Hi guys, Please check out the linked thread for more information. I think the question I asked at the end will get a better response in this forum than the finance one.

The shortened version is:

PPOR House purchased for $340k
about to become IP
Current value $300k -ish

Obviously, the higher my initial value, the lower CG i get and the lower CGT i pay.

Do I have to get a re-val before converting to IP to Calculate CG/CGT? or can I use the old, probably higher, purchase price?

If i get a reval now hoping it's higher, but it turns out to be lower, can I ignore it later when property sells and I have to calculate CG/CGT?

cheers,

ALso, Are capital losses simply deducted from taxable income?

 

[Terryw]

Yes a valuation would be needed when converting a PPOR to an IP
s 118-192 ITAA 1997
http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.192.html

When going from an IP to a PPOR none needed as it is worked out on a time proortion basis
s.118-185 ITAA97
http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.185.html

Capital losses are not calculated from income either. You just work out your CG and if it is negative then it is a capital loss. This doesn't affect your other income but will be carried forward to be offset by any future CGs.

 

[Jake D]

Thanks Terry,

Unfortunately the language in that document goes right over my head, so I'll have to take your word for it. (maybe I need too read some surrounding documents, Or maybe I'm a bit simple for it, IDK)

 

[BMan]

not knowing the rules like terryw does but are you sure you need a reval on the property to go from ppor to IP?
i thought its just based on the percentage of time its an IP
say you lived in it for 5 years rented it out for 5 years and sold it then 5 or of 10 = 50% so 50% of the CG is taxable..
it would be best not to get it revaled if possible and use the higher figure

 

[Jake D]

it would be best not to get it revaled if possible and use the higher figure

That's what I was thinking. But like you said...

not knowing the rules like terryw does...

which i why i ask.

 

[Jeith]

not knowing the rules like terryw does but are you sure you need a reval on the property to go from ppor to IP?
i thought its just based on the percentage of time its an IP
say you lived in it for 5 years rented it out for 5 years and sold it then 5 or of 10 = 50% so 50% of the CG is taxable..
it would be best not to get it revaled if possible and use the higher figure

Hi BMan,

terryw is correct here - you need to get a valuation done when changing a property from ppor to IP but not the other way around.

 

[BMan]

what happens if you dont?

 

[Terryw]

what happens if you dont?

The onus is up to the seller to prove the basis of the calculation tax return. So it would be impossible to calculate and apportion any gain - The ATO may assess you on the whole amount of the gain.

 

[Jake D]

But in this situation, the whole amount is less.

I've owned the property for 2 years. If i sell in, say, 2 more years, and by some miracle it happens to be worth $350k by then, without a reval now, my gain is $10k.

If get a reval now and it says $300k, then in two years, my gain is $50k. Therefore, more tax, right?

I see the necessity for a valuation at this point if my property has increased in value since I purchased it, but I feel like this could end up costing me more.

 

[Terryw]

You must work out CGT in accordance with the law.

If it is negative then you end up wth a loss and nothing to pay. Losses can be carried forward and may help if the future if you have capital gains.

Don't forget you can deduct certain items from any CG - buying and selling costs such as stamp duty for example.

 

[Jake D]

You must work out CGT in accordance with the law.

Of course.
And the law specifically states that I have to have a valuation when changing from PPOR to IP?
Was that in one of the linked documents you posted yesterday? Like i said, I didn't really understand them - are you able to dumb the relevant part down for me?

(I understand you've prbably got better things to do, but I appreciate all the help I can get)

 

[Terryw]

subsection 2 of s118.192

You are taken to have * acquired the * dwelling or your * ownership interest at the income time for its * market value at that time

It doesn't say you need to do a valuation, but you will need to establish its market value at the time. Really there is only one way to ascertain market value and that is to get a licenses valuer to give you an estimate.

Incidently, you could do the valuation down the track - years later maybe when you sell - but it needs to be a valuation of the value at this time.

 

[BMan]

ok so if my GF has had her house for 1 year then started renting it out and hasnt had a valuation done what does this mean?
she built it and the loan totaled 185k or around abouts the council rates value it at 245k
the loan is about 165k now
what is she meant to do now?

 

[Alex P Keaton]

subsection 2 of s118.192


It doesn't say you need to do a valuation, but you will need to establish its market value at the time. Really there is only one way to ascertain market value and that is to get a licenses valuer to give you an estimate.

Incidently, you could do the valuation down the track - years later maybe when you sell - but it needs to be a valuation of the value at this time.

Sorry to hijack thread but I have a relevant question. This did not even occur to me, having to do a valuation.

What happens if you just move out of your ppor and turn it into an ip just for 1 - 2 years and then you move back into it. Do you still have to do a valuation on it? thanks

 

[Alex P Keaton]

ok so if my GF has had her house for 1 year then started renting it out and hasnt had a valuation done what does this mean?
she built it and the loan totaled 185k or around abouts the council rates value it at 245k
the loan is about 165k now
what is she meant to do now?

oh haha. Same kind of question. I hadn't read this post yet!

 

[Terryw]

ok so if my GF has had her house for 1 year then started renting it out and hasnt had a valuation done what does this mean?
she built it and the loan totaled 185k or around abouts the council rates value it at 245k
the loan is about 165k now
what is she meant to do now?

This will depend.

Is your girlfriend a spouse? If so you only get one main residence CGT exemption between the 2 of you.

Assuming not a spouse then, did she live in the house before renting it out? Does she own any other house which she may be claiming as a main residence? If this is the only house and she lived in it before renting it out then she may be able to claim the exemption, including termporary absence, and avoid CGT. It would depend on the circumstances.
Loans are council rates notices are not relevant for calculating CGT either.

 

[Jake D]

What happens if you just move out of your ppor and turn it into an ip just for 1 - 2 years and then you move back into it. Do you still have to do a valuation on it? thanks

This is different as it is still your PPOR, therefore no CGT. Mine will no longer be my PPOR for tax purposes.

 

[Terryw]

Sorry to hijack thread but I have a relevant question. This did not even occur to me, having to do a valuation.

What happens if you just move out of your ppor and turn it into an ip just for 1 - 2 years and then you move back into it. Do you still have to do a valuation on it? thanks

If the temp absence rule is to be applied then no CGT so it may be irrelevant. If the rule doesn't apply then you may need to do a valuation now for the value as of the date you initially moved out.

 

[BMan]

This will depend.

Is your girlfriend a spouse? If so you only get one main residence CGT exemption between the 2 of you.

Assuming not a spouse then, did she live in the house before renting it out? Does she own any other house which she may be claiming as a main residence? If this is the only house and she lived in it before renting it out then she may be able to claim the exemption, including termporary absence, and avoid CGT. It would depend on the circumstances.
Loans are council rates notices are not relevant for calculating CGT either.

no shes not a spouse
yes she did
no
ok but what would happen if/ when she gets another PPOR or after the 6 years? should she get it valued then?

 

[Terryw]

If a PPOR will become an IP and the s118-145 CGT exemption won't apply then a valuation would be needed.