Buying a tenanted property

Discussion in 'Accounting & Tax' started by Frosty123, 15th Oct, 2019.

Join Australia's most dynamic and respected property investment community
  1. Frosty123

    Frosty123 Well-Known Member

    Joined:
    12th Nov, 2015
    Posts:
    226
    Location:
    VIC
    Hi all,

    I'm looking at bidding at an auction in Melbourne on the weekend. I've noticed in the Contract of Sale, that the property is currently leased out on a periodic basis.

    My wife and I are looking at purchasing this property for a knock-down-rebuild and to move into it as our PPOR.

    I wouldn't have any objection continuing the lease agreement whilst we take 6 months or so to work out our build. Just wanting to know what tax implications there are for us down the track if we do this. Will the property be subject to CGT upon selling it in the future (for the period it was leased out)? Will we be able to get a loan for the balance as PPOR, or will the banks treat this as an investment property?

    Thanks in advance!
     
  2. Ross Forrester

    Ross Forrester Perth business advisor and founder

    Joined:
    30th Oct, 2016
    Posts:
    2,079
    Location:
    Perth, Western Australia
    The property will be subject to cgt on sale for the time the tenant lived in it on a pro rata basis.
     
    Terry_w likes this.
  3. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    18,485
    Location:
    Sydney
    If First Home Grants and duty concessions are involved its worth checking entitlements based on the lease terms too.
     
  4. Frosty123

    Frosty123 Well-Known Member

    Joined:
    12th Nov, 2015
    Posts:
    226
    Location:
    VIC
    Thanks. How is the pro-rata calculation done?
    In other words, so I need to get a valuation done when we move in and make it our PPOR? Or when we sell the property, will it just be pro-rata based on the number of days it was leased out.
     
  5. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    18,485
    Location:
    Sydney
    Valuation will never be relevant. Pro-rata is based on TIME
    Eg Rented for the first 6 months. You then live there. And then sell.

    After 5 years 6/60ths will be subject to CGT
    After 10 years 6/120th is subject to CGT

    HOWEVER you can utilise 3rd element costs in your ownership period. These are ownership costs you dont claim deductions for. They will add to the costbase before the pro-rata and may significant reduce the profit subject to pro-rata. eg loan interest, rates, insurance etc. Strat maintaining this in the period when you occupy the property.

    Our CGT record keeping tool is a way to gather and maintain this knowledge FOREVER
     

    Attached Files:

    Michael Mitchell likes this.
  6. Ross Forrester

    Ross Forrester Perth business advisor and founder

    Joined:
    30th Oct, 2016
    Posts:
    2,079
    Location:
    Perth, Western Australia
    The pro rata is based on the number of days rented compared to the number of days used as a main residence.
     
  7. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    18,485
    Location:
    Sydney
    Hmmm. Not quite. That could produce a different result if read literally as "compared to the number of days used as a main residence"

    Its pro rata number of days rented v's days in the whole ownership period.

    Rented days - 182
    Residence days 3000
    Ownership days 3182

    For @Frosty123's sake its 182/3182 = 5.7196% taxable not 6.06666%
     
    Michael Mitchell likes this.
  8. Cia

    Cia Well-Known Member

    Joined:
    18th Jul, 2015
    Posts:
    140
    Location:
    Sydney
    Are you saying here Paul, that the usual expenses relating to an investment property can be used to reduce the cost base before calculating CGT. Is this also pro rata or does it apply for the full length of the ownership? eg in the above scenario 60 months of interest on the loan? all rates for 60 months or pro rata. all strata fees for 60 months or just the pro rata period etc. for all other costs of ownership too such as repairs, renovations etc....?
     
  9. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    18,485
    Location:
    Sydney
    All non-deductible ownership costs during the ownership period (tenanted or as main residence) can be added to the cost base if the property was not a main residence from day 1 (or as soon as practicable). During the tenancy period these are likely deductible (in whole or part) and then when its the main residence they will all count and accumulate further. A property acquired with a tenant is an example.

    eg property costs $500,000 with $25K of purchase costs = $525K costbase. Aftre three months tennat moves out. Assume ownership costs include rates, interest, repairs, maintennace etc. These are say $17,000 pa.

    Property is sold after 6 years. 3 months is taxable. 5.75years is exempt.
    Costbase is $525K + (5.75 x $17000) = $622,750. Selling costs are $25,000 taking the costbase to $647,750

    Sale is $680,000

    Profit is $680,000 - $647,750 = $32,250
    Taxable element is 3 / 60 x $32,250 = $1612
    Less 50% = $806 taxable
    At owner/s margin tax rates....
     
    Last edited: 24th Apr, 2020
    Terry_w likes this.

PFA Property Expo is designed in a way that visitors can gather maximum real estate knowledge with added benefits. Different speakers will be presenting on different topics as where to buy, when to buy in this market...