PPOR & taxation question

From: Lotana Von Amor


Dear Forum,

This question is probably very basic, but I would appreciate a clear-cut answer from those in the know.

Consider the following scenario (imaginary):

I bought P1 on 1 January 1994 and occupied it for 4 years till 31 December 1998.

Then I bought P2 on 1 January 1999, moved in to P2 and rented out P1.

On 31 December 2001 I sold P1 at a profit.
Over the period between 1/1/99 and 31/12/01 I claimed all expenses concerning P1 including interest on mortgage, agent fees, repairs, depreciation, etc.

My question is: can I declare P1 as my PPOR for the whole period of ownership including the last 3 years when it was an IP to avoid CGT liability? I realise that this will affect CGT liability when selling P2, but honestly at this stage this is not a priority.

Say cheese,

Lotana
 
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Reply: 1
From: Dale Gatherum-Goss


Hi Lotana

Yes, you can.

Have fun

Dale
 
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Reply: 1.2
From: Lotana Von Amor


Dale,

Thank you for boosting my spirit!

Regards,

Lotana
 
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Reply: 2
From: Marina .


On 9/20/02 1:21:00 PM, Lotana Von Amor wrote:
>Dear Forum,

Hi all,

I am having a little bit of difficulty understanding this.

What has me a bit confused is that if Lotana actually buys a new house for herself to live in and she wants to claim the first property as her PPOR for the entire time,(7 YEARS) then WHAT IS THE NEW PROPERTY CLASSED AS FOR THOSE FIRST 3 YEARS THAT SHE IS ACTUALLY LIVING IN IT.
If she is living in it and its not classed as her PPOR then what is it?

If she sold the new property than of course she would have to pay CGT on the first 3 years as she was claiming another property as her PPOR.
Is that correct?

I am just wondering that if I continue to say the first IP is my PPOR, then what do I tell the tax office and my friends about the second property that I purchased for myself to live in. Do I call it an investment or how do I describe it.

I hope I am making sense.

Thanks in advance.
Marina.




>This question is probably very
>basic, but I would appreciate
>a clear-cut answer from those
>in the know.
>
>Consider the following
>scenario (imaginary):
>
>I bought P1 on 1 January 1994
>and occupied it for 4 years
>till 31 December 1998.
>
>Then I bought P2 on 1 January
>1999, moved in to P2 and
>rented out P1.
>
>On 31 December 2001 I sold P1
>at a profit.
>Over the period between 1/1/99
>and 31/12/01 I claimed all
>expenses concerning P1
>including interest on
>mortgage, agent fees, repairs,
>depreciation, etc.
>
>My question is: can I declare
>P1 as my PPOR for the whole
>period of ownership including
>the last 3 years when it was
>an IP to avoid CGT liability?
>I realise that this will
>affect CGT liability when
>selling P2, but honestly at
>this stage this is not a
>priority.
>
>Say cheese,
>
>Lotana
 
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Reply: 2.1
From: Richard Hunt


Hi Marina,

The new property just continues to be Lotana's owner-occupied residence for which no PPOR CGT exemption is available (until P1 is sold).

It's true to say the new property would have an exposure to CGT based on the fact that no PPOR exemption was available for the first 3 years. However its not necessarily true that the actual appreciation in value during this period would be fully subject to CGT. This is because the CGT exemption is a "time" based exemption, ie. you calcuate the capital gain on the proportion of time that the property was not your PPOR.

For example, say the new property accumulated an unrealised capital gain of $100k in that first 3 years to 31 Dec 01 (when the exemption didn't apply) and was then sold a further 3 years (during which the exemption did apply) down the track on 31 Dec 04.

If the property market stagnates between 31 Dec 01 and 31 Dec 04 so that there has been no further appreciation in the value of the property at 31 Dec 04, then only 50% [(3x365)/(6x365) days]of the $100k would be the capital gain calculated under the PPOR exemption rules.


Regards
Richard
 
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Reply: 2.1.1
From: Marina .


Thanks Richard,

You have answered my question perfectly.

"The house is owner-occupied with no PPOR exemption applicable."
That makes a lot of sense now.

I wonder if this would work in my case.
We built our new home exactly the way we wanted and it has a lease on it. It just made more sense financially to do it that way. "DELAYED GRATIFICATION"

Just last week we purchased a block of land to build another house.
If we were to move into this property say for only 6 months we could claim PPOR status.

After the 6 months is up we then move into our DREAM HOME. We will continue to claim the PPOR status on that other property and not claim PPOR status on the DREAM HOME.

We do not intend to ever sell the DREAM HOME, so i do not need PPOR status but in 3 years time we could sell the Other property which has the PPOR status and not pay any capital gains tax. The capital growth is strong as there is limited land, and we then would be able to pay out the huge mortgage on the dream home within a couple of years.

Gathering by what was said in the posts, I would be able to do this.

Only one thing worries me. Is it O.K. to live in a property only for 6 months and then claim PPOR status.

Thanks so Much
Marina.
 
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Reply: 2.1.1.1
From: A Jones


Hello Marina,

I'll wait for the tax experts to answer your question. However your thinking is similar to mine.

If you have a dream home that you intend to live in forever why would you claim this as your PPOR. Apply the PPOR exemption to a another property you have lived in for the minimum acceptable period (6 months?)then let out as an IP (being aware that you can only claim PPOR for 6 years in one hit). You could even return to live in the PPOR for another 6 months towards the end of the first 6 year period. This would provide you with another 6 year PPOR period after you vacate and return to your dream home.

With the ability to draw down on the increasing equity in your dream home and your IP (your PPOR) (using Steve Navra's cash bonds method if required) there should be little need to ever sell your dream home and incur CGT.

AJones
 
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Reply: 2.1.1.1.1
From: Richard Hunt


Marina/AJ,

Your analysis is very close to the mark, I can't believe Governments are introducing tax laws that taxpayers can actually understand!!!

Marina, to obtain the PPOR exemption for the period starting when you purchased the land and ending when you move in on completion of the constructed house, you will need to live in it for a minimum period of 3 months. The maximum PPOR exemption when building is 4 years.

You could then move across permanently to the "Dream Home", and as suggested, continue to claim PPOR exemption on the IP for a maximum of 6 years.

There is no minimum prescribed period that a dwelling needs to be your PPOR before claiming the 6 year PPOR exemption, although in your case you also want the abovementioned "building" PPOR exemption, so in your case 3 months is it.

In the wash-up, under the scenario you describe, the constructed IP could be owned for a maximum period in excess of 10 years (4+6yr exemption) then sold, without any liability to CGT.

Best of luck!

Regards
Richard
 
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Reply: 2.1.1.1.1.1
From: Marina .


HI Richard,

Thankyou for your answers. I am however not sure about the 4 year rule now.

If it takes me 2 years to complete the building from the time of purchasing the land, this would be counted as 2 years PPOR status.I then move in for 3 months, and when I move out I get 6 years PPOR status, making it a total of 8 years.

Or do I get 4 years standard when building plus the 6years making it a total of 10 years.

I would be inclined to go with the first example. 8 years total PPOR status.


Thanks Richard for your time.
 
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Reply: 2.1.1.1.1.1.1
From: Richard Hunt


Marina,

My example was to demonstrate the "maximum" period the PPOR building exemption could be claimed by a person, ie. maximum of 4 years for purchase of land + construction.

The actual exemption when building will always be the "lesser" of 4 years or the actual period from purchase of land to moving in, which in your case will be 2 years.

Hope this clarifies things.

Cheers
Richard
 
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Reply: 2.1.1.1.1.1.1.1
From: Marina .


Richard,

Thankyou so much for your answers.
It all makes sense now.

Thankyou again

Marina.
 
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Reply: 2.1.1.1.1.1.1.1.1
From: Owen .


Marina/Richard,

That was a very interesting thread and got me thinking about one more question.

If I'm currently living in my PPOR and have been for years and never intend to sell it, can I just nominate one of my other properties I do intend to sell as my PPOR to get the clock started on the 6 year exemption? Would I have had to have lived in this other property at all or can I just say it's my PPOR?

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"
 
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Reply: 2.1.1.1.1.1.1.1.1.1
From: A Jones


Owen,

my understanding is that you can only claim PPOR exemption following living in the property. Seems like the minimum acceptable period to live in the property is 3 months before you can claim it as your PPOR (though I'm have not seen this exact time period is stated in the Income Tax Assessment Act or Rulings).

My accountant tells me the PPOR exemption is claimed in tax return relating to the tax year when the property is sold.

A Jones
 
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Reply: 2.1.1.1.1.1.1.1.1.1.1
From: Richard Hunt


Agreed, although there is no minimum period that the property needs to be your PPOR to activate the 6 year exemption. That said, you could take the view that the longer the period, the less likely it is that the ATO would challenge your claim that the property was your bona fide PPOR.

Regards
Richard
 
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