when is CGT exempt, if ever?

[r3ckless]

Hi Guys,

I have found myself prematurely in my next INV property purchase (scheduled to happen within the next six months).

Looking to purchase an INV property to house my parents-in-law. Now my partner (their daughter) is living with me however we may have the option to move into this INV property in the future. Really the only reason to move in there is to avoid any CGT if we ever plan to sell. Initially, for now there is no plan to sell the property ever. However if circumstances do change I may have my partner legally move in there for some capital gains exemption/discount.

AFAIK, If you sell the property within the first 6 or 7 years of ownership, as long as one of the borrowers reside in the property for minimum 6 months, CGT is discounted 50%.

May I obtain some clarity/guidance here?

Alex

 

[alexlee]

Can i suggest you forget anything you think you know about cgt?

Consider the information on the replies you get from a clean slate.

 

[r3ckless]

Haha, yep easily done, the above was what I was advised from a young accountant...

Clarity?

 

[alexlee]

CG is taxable income to the legal owners, and PPOR status depends on the legal owners. Who the borrower is doesn't matter.

For full PPOR exemption, the owner has to reside in the property from day 1 (some concessions for if the property was rented out when you bought it, you're moving between PPORs, etc).

If the owner resides there from day 1 until it's sold, and the property isn't rented out during that time (again, some quirks), full CG exemption.

One exception to this is usually called the 6 year rule, where if you move out of your PPOR, and do not declare another place your PPOR (commonly when you rent somewhere else) then your PPOR retains CG free status for 6 years. If you sell within the 6 years, it's CG free. You move back in within 6 years, it retains full CG exemption.

Capital gains is added to your taxable income for that year. Where you've owned the asset for more than 12 months, the amount is halved. e.g. the gain is $50k, but if you've owned the property >12 months, you declare $25k on your tax return. This is usually called the 50% discount.

Renting to your inlaws has its own issues. If you rent it at below market rates, you might not be able to claim all your deductions.

There are further issues with you and your partner (if you're considered de facto) claiming different PPORs, especially if it's being rented out to your in-laws.

 

[westminster]

That was a very muddly interpretation of the 6 year rule. You can find plenty of information on that here.

Essentially you can move into a dwelling and declare it your PPOR live there and THEN move out. IF for the next 0-6 years you have NO PPOR (ie renting, travelling etc) then the now IP remains your PPOR and can be sold within 6yrs of you leaving and be CGT free.

There is a lot more to it, but that is the gist.

You can't have 2 x PPORs except for very complicated reasons - this might be farmer in the country, wife moves to city to school the kids.

 

[r3ckless]

CG is taxable income to the legal owners, and PPOR status depends on the legal owners. Who the borrower is doesn't matter.

For full PPOR exemption, the owner has to reside in the property from day 1 (some concessions for if the property was rented out when you bought it).

If the owner resides there from day 1 until it's sold, and the property isn't rented out during that time (again, some quirks), full CG exemption.

One exception to this is usually called the 6 year rule, where if you move out of your PPOR, and do not declare another place your PPOR (commonly when you rent somewhere else) then your PPOR retains CG free status for 6 years. If you sell within the 6 years, it's CG free. You move back in within 6 years, it retains full CG exemption.

Capital gains is added to your taxable income for that year. Where you've owned the asset for more than 12 months, the amount is halved. e.g. the gain is $50k, but if you've owned the property >12 months, you declare $25k on your tax return. This is usually called the 50% discount.

Renting to your inlaws has its own issues. If you rent it at below market rates, you might not be able to claim all your deductions.

Hi Alex, Thank you for your detailed response!

Hmm, looks like no point in having my partner who is also a legal owner to reside in there


Capital gains is added to your taxable income for that year. Where you've owned the asset for more than 12 months, the amount is halved. e.g. the gain is $50k, but if you've owned the property >12 months, you declare $25k on your tax return. This is usually called the 50% discount.

1. From the above response, do any of the legal owners have to reside in the property at all to have 50% discounted for CGT as long as we own it for longer than 12 months?

Renting to your inlaws has its own issues. If you rent it at below market rates, you might not be able to claim all your deductions

2. Looks like I will start a new thread for this too

Again, thankyou!

 

[alexlee]

1. From the above response, do any of the legal owners have to reside in the property at all to have 50% discounted for CGT as long as we own it for longer than 12 months?

You're muddling concepts again. If you meet the criteria for CG exemption, there's no capital gains to declare. If you do have capital gains to declare, it's 50% discounted if you've owned the asset for more than 12 months.

Take a normal IP. You own it. You never live in it. You sell after 13 months. You declare 50% of the capital gains and pay tax on it.

Might be better if you don't try anything fancy, unless you're willing to pay an accountant (not the guy who gave you that cat's cradle in your first post) to hand hold you through it. Just buy a place, rent it out to strangers, your inlaws can rent from someone else. Pass them some money if you want to help them out.

 

[r3ckless]

You're muddling concepts again.

Just wanted assurity if residing in the place is needed or not.

Obviously I will have an accountant overlooking everything in terms of deductibility and any issues, only coming from a very green if any experience in terms of seeing whhat is deductible etc.

 

[Terry_w]

The starting point should be, that CGT applies unless there is an exemption.

The main exemption is for people's main residences. For a property to be your main residence you will need to live in it and establish it was the principal home.

You may be able to move out and to continue to treat the property as the main residence for a period of up to 6 years if you do not count another property as your main residence during this period.

 

[charlieandkath]

One exception to this is usually called the 6 year rule, where if you move out of your PPOR, and do not declare another place your PPOR (commonly when you rent somewhere else) then your PPOR retains CG free status for 6 years. If you sell within the 6 years, it's CG free. You move back in within 6 years, it retains full CG exemption.

Hi alexlee, I understand above point but have a further question. What happens to this rule when you sell say after 9 years of ownership? For example you buy a PPOR, live in it for 1 year from day one. Move out, never move back in, and sell property 8 years later.
Cheers

 

[Paul@PFI]

Year 1 = Exempt (MR)
Year 2- 7 : Property "may" be eligible for 6 year absence rule provided you did not own and occupy another MR anywhere else in the world. Lets assume you rent or live with parents.
Year 8 = Taxable
Year 9 Taxable

Therefore calc total capital gain say $100K
Then discount 50% (owned > 12mth) = $50K
Then apportion 2/9 x $50K = $11K

Reality is you dont use "years" but actual no of days when doing the calc.

$11k added to income and taxed - Assume rate 40% $4444 tax