Question on CGT

[pauly]

If you had 3 investment properties, with 300k equity between them (all from appreciation). If you sold then you would have to pay tax on this.

But if you borrowed down on these loans to purchase another property which you claimed as your PPOR, would you have to pay the tax on the money before it was put into the PPOR (Does this mean you only don't pay tax when buying another investment?), or does all the money go into the new house and when you sell this house down the track do you get to keep all the money or pay tax then even though its your PPOR?

 

[RumpledElf]

I think you're mixing up CGT and deductable debt.

CGT is just a tax at your usual PAYG tax bracket on any capital gains - ie, a tax on the profit you make when you sell a house. If you bought a house for $100k and it appreciates to $300k, you pay tax on $200k (well, half that much if you've held it for more than a year, and that number is affected by depreciation schedules and cost of major capital works). It doesn't matter if you've got a loan for $10k or $100k, or if that loan is secured by 1 property or 10, its just a tax on the profit you make.

You don't pay CGT when you use equity as security to buy another house, which is what you're asking - only when you sell the house and realise an actual capital gain, not a paper one from a revaluation to purchase a new property.

Disclaimer: I'm a serious amateur accidental landlord

 

[pauly]

Ok not sure if the question was answered but from the sounds of it, if you use equity from investment properties to purchase a PPOR when it comes time to sell your PPOR years down the track you must pay tax on the money that was brought over from the equity but not tax on the money from appreciation of the PPOR, is this correct?

 

[Ski-bum]

when it comes time to sell your PPOR years down the track you must pay tax on the money that was brought over from the equity but not tax on the money from appreciation of the PPOR, is this correct?

No Pauly. CGT is the tax you pay when you make a profit from a sale, including appreciation profit. You pay CGT on the difference between purchase cost and sell cost regardless of how much and where the loan money came from. Even if you paid for your property with cash upfront, no loan, it would still be liable to CGT. eg. purchased house cost $500K, sold for $1M = pay CGT on $500K.

Now, a few of the rules:

- if the property is your PPOR, you don't have to pay CGT at all
- if you need to pay CGT (ie. investment property/shares), then if you have held it >12 months, the amount liable for CGT is cut in half (ie. using above example $250K)
- CGT is calculated at your marginal tax rate for that year
- purchase costs, capital works costs and many other things can be added to the cost base to reduce the difference between buy & sell cost, thus reduce amount liable for CGT

I suggest you familiarise yourself with the ATO website, it is a wealth of knowledge! Here is a link about selling your PPOR:

http://www.ato.gov.au/individuals/content.asp?doc=/content/36878.htm

 

[RumpledElf]

- if the property is your PPOR, you don't have to pay CGT at all

Quoted for emphasis.

And it doesn't matter AT ALL where the money comes from.

For CGT on an IP, what matters is what you paid for it, what you spent on it (major things like kitchens etc), your depreciation schedule, and what you sold it for. Again, doesn't matter where the money to buy it came from.

Loan money and where it came from matters when you are claiming interest back on tax - ie, for those IPs, only the debt that you got for the IP is deductable. The extra money you drew out for a PPoR is NOT deductable. It makes the most sense having 100% loans on IPs and small loans on PPoRs for this reason. Plenty of threads on this around this forum.

 

[pauly]

Ok I'm either not getting my question across correctly or my newbee mind can't wrap my head around the answers that are given, ill try again, from the ATO website, it says you can ignore any captial gains or loss from a CGT if its your main residence. This I know. But it doesn't really help me.

So in the example I am talking about, lets say I have 3 IP's with 300k equity from appreciation between them. If I use that equity to buy a ferrari for example worth 300k, when it comes to tax time I must claim this profit of 300k and pay tax on that.

But if I use that 300k as security to buy another IP then I don't pay any tax. But if I then sell this house for 300k two years later, I haven't made a profit so theres nothing to pay tax on? But this doesn't make sense because it would mean I get to pocket 300k where in the other scenario I would have to pay tax on it. So I'm obviously confused here.


And same deal with PPOR, say I buy a house which is my residence for 300k with this money that has come from appreciation in IP's, And I live here for 2 years but the house is still worth 300k (just for this example to get my point across), because it's my PPOR I am exempt from the CGT (even though there has been no appreciation so no profit) and I would get to bank the 300k without paying any tax. But this doesn't doesn't make sense because then you have avoided paying tax on this money that you made from IP's.

Sorry guys but as you can see im a bit confused thanks for bearing with me.

 

[coastymike]

Use examples always easier.

Bought IP 2004 $400k. Now worth $700k. Capital gain $300k. I think you are using the term capital gain and equity interchangably which is causing the confusion because the two are different but let's run with them being the same.

Sell IP. Capital gain $300k. Discounted gain $150k. Tax payable on the $150k. Doesnt matter whether you use the $300k which will be less after you pay tax to buy a ferrari or another IP. There are no rollover provisions in Australia for selling an IP and purchasing another one unless you are can claim the small business CGT concessions (let's assume not)

 

[mary&mat]

Ok I'm either not getting my question across correctly or my newbee mind can't wrap my head around the answers that are given, ill try again, from the ATO website, it says you can ignore any captial gains or loss from a CGT if its your main residence. This I know. But it doesn't really help me.

So in the example I am talking about, lets say I have 3 IP's with 300k equity from appreciation between them. If I use that equity to buy a ferrari for example worth 300k, when it comes to tax time I must claim this profit of 300k and pay tax on that.

But if I use that 300k as security to buy another IP then I don't pay any tax. But if I then sell this house for 300k two years later, I haven't made a profit so theres nothing to pay tax on? But this doesn't make sense because it would mean I get to pocket 300k where in the other scenario I would have to pay tax on it. So I'm obviously confused here.


And same deal with PPOR, say I buy a house which is my residence for 300k with this money that has come from appreciation in IP's, And I live here for 2 years but the house is still worth 300k (just for this example to get my point across), because it's my PPOR I am exempt from the CGT (even though there has been no appreciation so no profit) and I would get to bank the 300k without paying any tax. But this doesn't doesn't make sense because then you have avoided paying tax on this money that you made from IP's.

Sorry guys but as you can see im a bit confused thanks for bearing with me.

If you're using the $300K to make money ie IP (business purposes), then yes, CGT applicable.
If $300K for PPOR...not a business/money making scheme...no tax.

 

[pauly]

RumpledElf said
"You don't pay CGT when you use equity as security to buy another house"

But if you sell the house and hence realize a profit then you'll be up for CGT.

But what if you use the equity to buy an IP, hence you don't have to pay CGT.

But then you sell the IP and because you sold the IP for the same you brought it for you don't have any profits to be taxed on?

 

[coastymike]

what if you use the equity to buy an IP, hence you don't have to pay CGT

Where in the tax act does it say that ?

 

[mary&mat]

It's all about when you actually sell & the 'making of a profit' comes into it

ie when you realise the profit

 

[tobe]

all of these last 4 statements are correct, but I think your now mixing up profit, which is the diference between buy and sell price after you have sold, and equity, which is similar, but before you sell.
As CGT is not charged until you sell, you can use the equity, which is money borrowed from a bank based on the value of your property, to buy anything you like with. You obviously will now have a liability against the equity which you will have to make payments on.

Does that make sense?

I know I was initially confused, because in the US you can transfer CGT liability when you sell if you purchase another income producing property at the same time. This is not the case in Australia.

 

[pauly]

oh man I really don't think anyone is understanding me I have to try and explain this better.

If I use 300k equity in an IP to purchase another IP there is no profit realized so no CGT is applicable correct?

Now if I sell that IP I just purchased for the same price I brought it for (300k) do I pocket that 300k and can do whatever I like with no (no tax payable because the difference between the brought and sold price was the same?)
Yes I know I will be repaying the original loan to the bank but these will be tax deductible because its on an IP.

This way I free up the 300k do whatever I like with, where as if I just sold the property I would have to pay tax on that money.

 

[Jeith]

Pauly

If you were to refinance the loan now and take the $300k to do whatever you like with it (assuming a bank would let you do it), then there would be no tax payable. Tax would only be payable when you realise the gain on the IP by selling it.

Let’s use a few more examples….

IP purchased for $400k, it is currently worth $700k. If you were to sell it you would have a capital gain of $300k – this would be included in your tax return (you would probably also be eligible for the 50% discount).

The amount of equity you have in the property is irrelevant for tax (CGT) purposes. You could have purchased the IP for $700k but over the years have reduced the loan by $300k through repayments – then there would be no capital gain.

If you use the $300k in equity to buy another IP and in a couple of year’s time sell it for $300k, then there wouldn’t be a capital gain on that particular IP but that doesn’t have anything to do with the realised/unrealised gain on the first IP that is worth $700k.


Hope this helps

 

[pauly]

Ok I finally get it.

Example.

400k property brought in 2002, now worth 700k.
Had a 400k mortgage but paid 100k off, so owing 300k to the bank.

So now I have 400k equity (300k equity from appreciation and the other 100k is from money I have put on it over the years), I borrow 300k against this equity and buy a ferrari.

My loan to the bank is now 600k (the 300k that was originally left on the loan and the 300k I pulled out using equity)

So now I can do whatever I like, I can crash the ferrari lose all the money another 5 years go buy and I decide to sell the house for 900k.

I will pay CGT on 900-400=500k (minus any deductions/exemptions I can get)

So borrowing against your equity is really just another loan from the bank expect it uses your house as a security? (I couldn't walk into a bank and ask for a personal loan of 300k because even if I did get it, it would be extremely high interest rates, where as using equity I get home loan rates, is this correct?)

 

[Ed Barton]

Ok I finally get it.

Example.

400k property brought in 2002, now worth 700k.
Had a 400k mortgage but paid 100k off, so owing 300k to the bank.

So now I have 400k equity (300k equity from appreciation and the other 100k is from money I have put on it over the years), I borrow 300k against this equity and buy a ferrari.

My loan to the bank is now 600k (the 300k that was originally left on the loan and the 300k I pulled out using equity)

So now I can do whatever I like, I can crash the ferrari lose all the money another 5 years go buy and I decide to sell the house for 900k.

I will pay CGT on 900-400=500k (minus any deductions/exemptions I can get)

So borrowing against your equity is really just another loan from the bank expect it uses your house as a security? (I couldn't walk into a bank and ask for a personal loan of 300k because even if I did get it, it would be extremely high interest rates, where as using equity I get home loan rates, is this correct?)

i think you're almost there pauly

in your example you made a 500k gain, but since you held the asset for more than 12 months you are entitled to cut the gain in half. you add 250k to your taxable income.

i still don't think you understand the difference between income tax and capital gains tax. it doesn't necessarily make sense, it's just how it is.

you can only have one principal place of residency that is exempt from cgt.

l



you buy a

 

[pauly]

Income tax is the tax that is taken from your income where as capital gains tax is the tax from any capital gains, eg sales of an investment property or shares etc. I think thats right.

If you make 120k salary, and got taxed 35k (income tax), but you made a profit on a house you held for 5 years of 200k (have to pay tax on 100k). Then taxable income for that year is 120K+100k=220k minus any deductions.

Which would means you pay roughly 80k in tax, leaving you with 140k +100k from the sale of the house.

Which means you are up 240k in your bank account for the year (and not a bad year that is)

But at that point you would be smart to have several investment properties negatively geared you can pump a lot of money into and offset that 80k tax!

All is good?