IP then PPOR + renovation - how CGT calculated

Background
I have an existing property, PPOR, tenants in common (house1).
I will buy a new property worth say $500,000 (house2).
House2 will be 105% funded by loan (with surety from house1).
Once my co-owner of house1 is ready in 6 months or so, they will buy me out and I will put the money into house2.

As regards CGT...

Option 1 (IP first then PPOR):
  • rent house2 for 6 months, sell house1, get valuation on house2, move into house2 as my new PPOR, renovate for $1,000,000, sell 5yrs after buying for $10,000,000 (lol).
  • benefit: low CGT (if any), I'm in the ACT so can claim stamp duty
  • on sale of house2, CGT would be calculated on the difference between the purchase price and valuation at the end of 6 months - ie. it wouldn't take into account the renovations and *subsequent* (!) increase in value (due to combination of renovations and land increase).

Option 2 (PPOR, then IP, then PPOR):
  • move into house2 for 1 month moving PPOR, leave house1 unrented ("vacant"), after 1 month move back into house1 and rent house2 for six months, then get valuation and do as option 1 after valuation
  • benefit: no CGT payable at all
  • on sale of house2, CGT would not be payable due to the six year excemption; no CGT is payable on house1 as it has never gained income while it wasn't a PPOR

Q. Are either of these options correct vis a vis CGT?

Another way of asking is: if I immediately rent out a newly bought property for six months, then move in as PPOR, is the CGT payable on a valuation difference between the start-end of rental, or fully on the sale-purchase price (whether that has increased by land, land + reno, or reno only)?

I've trawled the forums and ATO and can't work out what may be obvious...
Thanks for any unofficial help you can give!
 
I have struggled to follow this. But then I dont focus well when I'm not being paid. Amazing powers of concentration when its a client....

You can have ONE PPOR at any time. Its a question of fact. During that period its CGT exempt. You move out and CGT clock starts to tick. The other property is exact opposite.

BOTH properties will be subject to CGT. except for:
- Exempt period of residence
Refer to first para.

6 year rule requires you have NO OTHER Main residence while absent. You want to have two. FAIL

Land tax ignores that rule. It requires you to reside there for at least six months before you move and also has a "single" residence rule.

The 50% ownership is confusing. Your share only is subject to CGT if you only sell your TIC portion.

. Its possible in your secanrio you will pay land tax on both subject to valuation of the unimproved land.

A tax proof tip:
CGT = Nil if you dont sell
CGT = Nil if its your own residence in its simplest form for every day of ownership.
Can you avoid selling the IP and sell the main residence ?

The sale of IP1 within 6 months "might" allow access to a dual residence issue. Need to check to see if state land tax would act contrary though.
 
Background
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Q. Are either of these options correct vis a vis CGT?

Another way of asking is: if I immediately rent out a newly bought property for six months, then move in as PPOR, is the CGT payable on a valuation difference between the start-end of rental, or fully on the sale-purchase price (whether that has increased by land, land + reno, or reno only)?

If you buy an IP and after six months move into it then its no longer deductible etc. WHEN and if you sell that property is subject to CGT on a prorata basis..Ignoring CGT discounting....ie sell after 2 years its 6/24th of profit. After 4 years its 6/48ths. Question is what is the total profit after 2,4,10, 15 years ???

Nobody I know choose a house based on saving a few grand in tax.
 
If you buy an IP and after six months move into it then its no longer deductible etc. WHEN and if you sell that property is subject to CGT on a prorata basis..Ignoring CGT discounting....ie sell after 2 years its 6/24th of profit. After 4 years its 6/48ths. Question is what is the total profit after 2,4,10, 15 years ???

Nobody I know choose a house based on saving a few grand in tax.

Thanks Paul, and sorry for not being clear.

What is not clear to me is what the CGT valuation is based on when the IP is sold. I have a (very good) solicitor who says that if I (hypothetically) buy and immediately rent an IP for 1 year, then move in and designate as PPOR for the next 4 years, then I sell,
...then the CGT can be based on the difference between buy price and a valuation at the end of 1 year, NOT a difference between buy and sell price (the 6/60=1/10 or 1/20 with discount).

I always thought it was a simple difference between buy and sell price (which is what you said above).
But, also, I thought that when I moved into it as a PPOR (after rental) I could increase the base price (ie. buy price) with the capital (renovation) works planned. So the CGT then became more on the capital value increase of the land more than the house.

e.g.
Buy $500,000
Rent 1 yr
Valuation at end of 1st year $520,000
Move in, designate PPOR
Renovate with capital expenses of $200,000
Sell after total of 5 years at $800,000

Version 1 CGT (yours?) = 800,000-500,000 = 300,000 * 50% discount * 1yr/5yrs rented = 30,000 taxable

Version 2 CGT (solicitors) = 520,000 - 500,000 = 20,000 * 50% discount * (making something up - not clear!) = 10,000 taxable

Version 3 CGT (mine :rolleyes: ) = 800,000 - (500,000+200,000) = 100,000 * 50% discount * 1yr/5yrs rented = 10,000 taxable

I'm not sure I'm being clearer though :eek: . I have appointment with accountant later in the week, but I'm trying to understand so I go in with something other than confusion in my mind!
 
What is not clear to me is what the CGT valuation is based on when the IP is sold. I have a (very good) solicitor who says that if I (hypothetically) buy and immediately rent an IP for 1 year, then move in and designate as PPOR for the next 4 years, then I sell,
...then the CGT can be based on the difference between buy price and a valuation at the end of 1 year, NOT a difference between buy and sell price (the 6/60=1/10 or 1/20 with discount).

This is not correct.

If you move out of a main residence and rent it then the valuation at the time of it firs producing income is relevant, s118-192 ITAA97

However, if you move into a rental property then it will always be subject to CGT based on a percentage basis. s118-185
 
This is not correct.

If you move out of a main residence and rent it then the valuation at the time of it firs producing income is relevant, s118-192 ITAA97

However, if you move into a rental property then it will always be subject to CGT based on a percentage basis. s118-185

Thanks Terry (and everyone) for your help!

The question for me is the cost base for the CGT - is it the valuation (I doubt it and although noone has been explicit, it seem correct), or is it the original purchase price.

I'm now assuming it's the original purchase price and my solicitor is wrong :(.

The new question for me is how to control the increase of the cost base due to a) renovations during PPOR, and b) the combination of renovations and land value increase.

For example, if the situation is that:
- I buy at $500k,
- rent out immediate for a year (thus subject to CGT),
- make property PPOR,
- do $100k of reno,
- sell in 4 more years (5 total) for $700k.
The $200k capital gain can be loosely apportioned as being $100k due to renovations (and raising the CGT cost base), and $100k other things (at least somewhat due to a general rise in land prices presumably).

Now, if I can prove - via valuation - that during the first year (rental) the property went up 0%, and all of the rise happened in the 2-5th years, does that make a difference to CGT? So far as I can find out, it appears not...

What about if I can demonstrate that the entire street, suburb and town had a negative or zero increase for year 1, 2, 3 and 4, but then went up 1% in year 5. The sale price *should* be $500+$100 reno * 101% = $606k. Yet through good selling and canny renovations, I've instead sold for $700k. This gain is palpably nothing whatsoever to do with the 1yr rental at the start, yet as far as I can see the CGT calculation doesn't take any of this into account and will still be sellprice-buyprice+costbaserise ($700-$500+$100=$100). Is that right?

Hopefully becoming less confused...
 
There is no valuation, as has been pointed out already.

The ATO enjoys part of the capital growth funded by your renovations.

Yes your cost base will increase, but the value adding beyond this will be subject to CGT.

Not to mention the opportunity cost of your own labours which will not be added to the cost base.

Obviously, the longer it is your exempt main residence then the smaller percentage is enjoyed by the ATO.
 
Thanks Terry (and everyone) for your help!

The question for me is the cost base for the CGT - is it the valuation (I doubt it and although noone has been explicit, it seem correct), or is it the original purchase price.

I'm now assuming it's the original purchase price and my solicitor is wrong :(.

The new question for me is how to control the increase of the cost base due to a) renovations during PPOR, and b) the combination of renovations and land value increase.

For example, if the situation is that:
- I buy at $500k,
- rent out immediate for a year (thus subject to CGT),
- make property PPOR,
- do $100k of reno,
- sell in 4 more years (5 total) for $700k.
The $200k capital gain can be loosely apportioned as being $100k due to renovations (and raising the CGT cost base), and $100k other things (at least somewhat due to a general rise in land prices presumably).

Now, if I can prove - via valuation - that during the first year (rental) the property went up 0%, and all of the rise happened in the 2-5th years, does that make a difference to CGT? So far as I can find out, it appears not...

What about if I can demonstrate that the entire street, suburb and town had a negative or zero increase for year 1, 2, 3 and 4, but then went up 1% in year 5. The sale price *should* be $500+$100 reno * 101% = $606k. Yet through good selling and canny renovations, I've instead sold for $700k. This gain is palpably nothing whatsoever to do with the 1yr rental at the start, yet as far as I can see the CGT calculation doesn't take any of this into account and will still be sellprice-buyprice+costbaserise ($700-$500+$100=$100). Is that right?

Hopefully becoming less confused...

All of that is irrelevant.

But if you spend money on renovations this will increase the cost base and thereby reduce CGT. But as Rob points out you will pay tax on part of the growth because it is calculated on a % basis so your renovations are increasing the value and benefitting the ATO as well as yourself.
 
The biggest mistake made is guessing tax decisions. Paying for advice saves money

Interesting Paul - you must be incredibly different. So far I've had diametrically different opinions from 2 solicitors (paid), and one accountant (paid). I get the feeling that paying gets me no closer than putting my finger in the air, or asking on this forum :D. In fact, the forum(s) - and I really mean everyone who has responded - have been far more useful!
 
Macarthur...Asking tax advice from a solicitor highlights a concern.

1. They are qualified in law. This includes tax law.
2. They may not specialise or practice in tax law or all elements of it.
3. They may actually not be registered to provide tax advice with the Tax Practitioners Board.

Just as I am prohibited by the Legal Practitioners Act from practice of law as I'm not a solicitor, a lawyer should be registered with the TPB to provide tax agent services. Tax Agent Services are regulated by the TPB not the law society.

Many tax agents also dont practice in the area of property taxes. That includes income tax, CGT, GST, land tax, stamp duties etc. many tax agents think all cap gains are apportioned. The s118-192 valuation is relevent in some cases yet some agents dont know and fail to mention it. You might be able to get a retrospective valuation - depends. In others you must apportion so valuation a waste of time, money and effort. Then there is the "seperate CGT asset" rule that is OFTEN mucked up. If you spend more than the threshold you can end up with two CGT assets and need to split the sales proceeds and calc two CGT items.

You may actually be able to rely on that ? That will quarantine some CGT to a period and perhaps limit the tax. It may also mean its not a discount gain. It all depends on your situation.

See its complex. Perhaps you need a good property tax person ? Happy to talk offline and assist you. I assist many on SS.
 
Interesting Paul - you must be incredibly different. So far I've had diametrically different opinions from 2 solicitors (paid), and one accountant (paid). I get the feeling that paying gets me no closer than putting my finger in the air, or asking on this forum :D. In fact, the forum(s) - and I really mean everyone who has responded - have been far more useful!

At least you will have recourse to sue the advisor who will have PI insurance to cover any negligent advice - assuming they are advising in their area of practice.
 
Just as I am prohibited by the Legal Practitioners Act from practice of law as I'm not a solicitor, a lawyer should be registered with the TPB to provide tax agent services. Tax Agent Services are regulated by the TPB not the law society.

Hi Paul,

I don't believe legal practitioners need to be registered with the TPB unless they are going to lodge or make statements.

Therefore any taxpayer's recourse through contract and tort law is a bit of a disadvantage considering the other party is a legal professional.

At least with the Tax Agent Services Act, no amount of legal disclaimers is an effective defence for a registered tax practitioner and the regulator has statutory powers which it does actually use in anger !

Also, there is the safe harbour defence available to the taxpayer where their registered tax agent fails to take reasonable care.
 
Rob - Correct. They have a limited exemption.

IMO not all tax agents are competent in all areas of tax law and same applies to legal practitioners who have various areas of specialisation. A tax practitioner who displays qualities inconsistent with the TPB can lose registration and right to operate in tax - No TPB sanctions for a legal adviser ?The taxpayer reliance on safe harbour isnt available for lawyers not registered with TPB. I argue that a lawyer who is registered with TPB is a probablya better choice that one who is not.

The lawyers exemption is a larger issue than the AFSL accountants exemption attracting much noise.
 
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