Bought PPOR with existing tenant - Tax Approach

Good morning,

To begin with, thanks to those on this forum. Your posts are tremendously helpful and have been great to read.

I post here today not seeking recommendations or financial advice, instead I ask for some direction.

For context:

• In May of 2021 I purchased a property (with LMI) that I intend to use as my PPOR with an existing tenant in it until March of next year (10 months)
• Settled in the middle of June
• It is registered with bank and Office of State Revenue as the PPOR
• Spent about $5K on repairs of the property before June 30 2021
• Received no rental income until July 2021
• I have not had the property independently valued at time of purchase (beyond that of what the bank did to approve the loan)
• The property was built in 1950 and underwent significant renovations in 2017 (estimated $60K) and 2019 (estimated $45K). I haven't engaged a quantity surveyor for these figures. These are based on numbers from a chippy friend

Now for the questions:

I'm preparing for my tax return for the 20/21 Fin year and also looking ahead to the 21/22 Fin year. I'm hoping to get clarity on a few things and would appreciate any direction you can provide.

1. As I wish to use this as my PPOR I want to minimise any CGT events. Will I be eligible to use the 6 yr rule and not pay any CGT when I eventually sell in many years to come?
2. Am I best to report an Investment Property for the 20/21 return or would I be best to leave it and simply report on it for the July 21 - March 21 period that it is rented in my 21/22 return?
3. In the event where I do include it as part of my return for 20/21 is there any value in engaging a quantity surveyor in an effort to claim the depreciation associated with the renovations in 2017 and 2019?

Outside of this, if you were me, what would you do more broadly? This is my first step into the property market (I own nothing else) and I'd love to begin my journey on the right foot (I may have already muddled this up).

Thanks a lot,
TommoAus

 

Seek out proper tax advice and use a tax agent prepare your return.

 

How did you settle a tenanted property in june and do not have rental income to declare until july? Did the managing agent send you a 20/21 statement?

 

1. it is not your main residence yet so no. after you move in and establish as the main residence you could potentially use it, but it would never be CGT free.

2. You have to declare income when it is recieved, and expenses when incurred. This includes when an agent receives the income on your behalf

3. potentially..

 

This forum is incredible - thank you for the fast replies!

For clarity, I have engaged and accountant. I always find more personal growth from forums such as these though - thanks for sharing.

The tenant pays monthly and the agent didn’t transfer to me until 1 July 2021. What is the course of action in this circumstance?

Thanks Terry for clarity on the CGT. Say I were to move in come March - how would the CGT be calculated if I sold it 6yrs later?

 

Did the agent send you a June, or end of financial year rental statement? Take that to your accountant.

did you claim first home buyers grants for this property?

 

I did not claim first home owners as the purchase price was outside of the threshold.

 

It isn't your ppor, so you should register with the OSR as an IP or you will get hit with landtax penalties if the value exceeds the threshold.

Initial repairs

Money was rec'd by you (via agent) in June.

Speak with a QS like @Depreciator who will confirm if it is worthwhile.

 

Thanks Scott. I’ve been trying to negotiate with the tenants to move in prior to the 6mnth mark which from my understanding would qualify for the PPOR ruling still, not IP.

 

If it is rented for a year before you move in 5/6ths should be CGT free, generally.

see
Tax Tip 120: CGT and moving into an Investment Property https://propertychat.com.au/community/threads/tax-tip-120-cgt-and-moving-into-an-investment-property.10714/

 

This doesn't make sense. There is no 6 month rule like this.

Are you talking land tax? To get the exemption, in NSW, you would generally have to be living in it at the 31st Dec, but there is a 6 month requirement there meaning you have to move in before 1 July, but you are likely to be under threshold anyway.

 

6 mths first home buyer maybe ? Maybe land tax ....

 

As the property will be eligible for the PRO-RATA CGT exemption calculation basis (based on days taxable v total days) the CGT % will dilute with time. But its important to know what costs add to the costbase as well as you can also dilute the issue further. You cant create a loss however. Third element costs will be your friend.These are any non-deductible ownership ciosts in the period you own the property even when its your home. You should ensure you tax adviser guides you on this. Your CGT records should be continually maintained to ensure youy retain record of your ownership costs when it is your home. For example maintaining the property while it is your home wont be deductible but will reduce CGT.

 

Hi all,

This is the concession (in QLD is the purchase location) I'm referencing based on if I can successfully move in within 6mnths - here.

 

yes that could save you some stamp duty

 

Sounds like I got one thing right! Ha. Thanks Terry. I will of course need to advise OSR if I can't make that 6mth date. Trying to win over the tenants to get them out early.

Tez, if you were me, what would have you done? Would you have bought the property at all? From what I can gather it has appreciated about $100K since time of purchase. Although since it is rented I imagine that will be an amount that goes straight towards CGT?

 

I wouldn't worry about losing the full exemption for CGT. In the long run it will turn out to be insignificant.

See
Tax Tip 86: Don’t be so fearful of generating income from the main residence Tax Tip 86: Don’t be so fearful of generating income from the main residence

 

Hi all,

I wanted to say thanks for the posts that you made and your contributions. This has been of a tremendous help and has allowed me to further inform the conversation that I was having with my accountant.

I'll be sure to look at those Tax Tips Terry.

When it comes to acquiring a second property using the equity.. any recommendations on particular threads or additional Tips Terry to start with?

 

Try this
Terryw’s Ideal Loan Structure
Terryw’s Ideal Loan Structure

 

To answer the question you just messaged me, Tommo, a QS could estimate the cost the works done by the previous owner. If they indeed totaled around $100K, that's around $2,500 per year you can claim.
Scott