A CGT question that Paul will know the answer to.

A friend of mine owns a flat that he has been renting out for 5 years. It was his PPOR. He will move back in before the 6 years is up. While he was renting it out, he lived in a rental property, so no CGT obligation there.
Now, he plans to rent out a room on Airbnb when he moves back in. Rent will be declared as it must and relevant expenses claimed. The problem is that he will be up for CGT if he sells one day because the property will have been earning income for over 6 years (even though for part of the time he lived there, too).
If he was to move back in and live by himself for, say, 6 months BEFORE starting to rent a room out will the 6 year CGT thing 'reset' itself? Will he then have up to 6 years of renting out part of the property with no CGT complications?
He will talk to his accountant, of course, but I thought I would canvass opinions here - it's often best to go to an accountant having done a bit of homework.
Scott

 

He cant claim the 6 year rule when living in the property because he wont be absent.
S118-145

 

Thanks Terry. Found this on that S118-145.

(2) If you use the part of the * dwelling that was your main residence for the * purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is 6 years. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence.

So he would need to not live there to get the CGT exemption.

 

Yes tax law is sometimes seemingly illogical or unfair. If you dont live in it and rent it out its CGT exempt under the 6 year rule (providing eligibility is met) but if you move back in and rent a room it loses a portion of the exemption (ie 50%).

Another one I dislike is the 6 month dual residence overlap rule. You own a PPOR and decide to sell it. You buy another property and move straight in planning to sell the former home within 6 months. If that happens BOTH properties get exemption for the overlapping ownership period but if it takes 6months + 1 day to sell then only one property is exempt during that six months. Its a use it or lose it rule.

This issue is also a good time to remind all that the 6 year rule is NOT automatic. There are conditions to be met. Sometimes many people just assume if it was your home and you move out then its 6 years . Not quite true.

 

However, your friend will be able to include in his cost base costs of owning the property (e.g. interest) to the extent they are not deductible. This should minimise (or potentially eliminate) any capital gain. See sections 110-25(4) and 110-45(1B).

 

Thanks Daniel, I'll pass that on. It's a beachside property in Sydney that he bought before the recent boom so the capital gain would be nuts.

 

He may get a market value cost base under s 118-192 at the time when he starts to rent out a room if he moves back in first. I haven't considered how s 118-192 interacts with s 118-45 (i.e. whether the fact he has used the 6 year rule has any impact). Maybe @Terry_w or @Paul@PFI knows?

 

Thanks again, Daniel. He gets vals done regularly - vals are a bit like sport for people over here.

 

I tjink i have written one or two tax tips on this.

 

s118-192 - "first used to produce income" has a nice little element in sub (1) which relates to the word ïf"....that qualifies it to instances where a 100% exemption would not otherwise apply. There is a (b) test which excludes a 100% exempt asset IF a hypotetical CGT event had occurred prior to the first income. So s118-192 cant be used with the 6 year rule.

 

SO ..this is what I can't get my head around. You sell the old place after 6 months and one day. You live in the next place for 20 years. Is it NEVER your PPOR??

 

ATO ID 2003/1113 ... interaction

Cost base will be the mv when FIRST used for income (s.118-192), even if the absence exemption was invoked at the time (s.118-145).

MV when first vacated. Deemed ownership from this date for apportionment.

 

So he will potentially get a market value cost base when he first started renting the property out 5 years ago. From there he needs to pro-rata the capital gain. He can also include non-deductible costs of ownership from then.