IP turns PPR, then want to sell..CGT??

G'day all, any advice/comments on the following is greatly appreciated.

I purchased my first and only house in 2003 as an investment property. I was living abroad and therefore didn't require residing in the house until only last year when I returned to Australia.

The property was purchased for $190,000 in 2003 and valued recently at $300,000.

I want to add value to the property with a 2 story extension and then sell it next year 2011, for a guestemated $480,000.

My questions are:

1:

If I sell now, as it was an IP from purchase Jan 2003 until Jan 2008, then I moved in and it became PPR, how would the capital gains tax work?

That’s 5 years as IP and 2 years as PPR, therefore would this prorate the CG of $110,000 over 7 years, then I only pay CGT on the 5 years as IP.

2:

If I now renovate and add a further $180,000 value, would the CGT for this added value be prorated over the whole period of ownership, or based on the years of owning it as a PPR and therefore be CGT free?

Any help is much appreciated.

Cheers
:)
 
1. Yes - 2/7 of the gain would be exempt, 5/7 would be taxable. Strictly speaking it should be pro-rated based on the number of days, not years.

2. Unfortunately no - you can't separate out gains made in periods of use as PPOR vs rental. There is a specific formula in the tax law which says quite clearly that it's to be pro-rated soley based on "non-main residence days" vs "days in your ownership period". No other considerations are taken into account.
 
Taxguy, can they not use the figure from the valuation (now that it is a PPOR) and any increase in value from that time onwards is not subject to CGT? I thought you could do it pro-rate or use valuations to mark the value at a certain period of time....

Gools
 
There's no provision for using any valuation halfway through the ownership period.

The actual law is here (if you can read it):

http://law.ato.gov.au/atolaw/view.htm?DocID=PAC/19970038/118-185&PiT=99991231235958

You might be able to "sell" the asset now (say, transfer to spouse) to realise the capital gain which has accrued so far, then claim the main residence exemption for the period going forward. However this would realise a tax liability immediately and you would probably be up for stamp duty too.
 
Just to clarify - there is a provision which allows you to take the market value at the time a PPOR becomes an IP as your cost base (s 118-192).

It doesn't work the other way around, when it's an IP that becomes a PPOR.
 
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