Capital Gains Tax

Hi there,

I'm a total newbie to property investment and am just starting to learn about it really. I've never owned a home so know little about it.

Atm my husband and I are a one income family, i'll be returning to work next year full time and we will be ready to buy soon after.

Unfortunately we are totally priced out of the area we live in , we wont have a huge deposit and I refuse to pay a ridiculous amount for a house and have no life due to financial restraints even if we did have a big deposit.

So we are considering buying an investment property for a much smaller amount, no more than 300-400k and carry on renting in the suburb we want to live in.

My question is do I have to claim that property as an investment property? It will be my only owned address so could I say it is my PPOR or will I have to declare my rental home that I live in as that? Is there a way around this?

I would be renting the investment property out and hoping it will grow in value and be our nest egg for retirement to either live in or sell. Or it will become equity for a property where we do want to live.

I'm hoping there is some way I can say its my PPOR as its my only owned home and then we dont need to pay the capital gains tax. Is this so or am I dreaming?

Thanks

 

If you moved into it briefly you can claim it's your PPOR. You could then move out and rent and still claim it as your PPOR for 6yrs and not be subject to capital gains tax. But u would have to move back in after 6yrs...

Not sure what minimum living times are to claim it as a PPOR or what you have to do so it is still considered PPOR and not an investment.

 

Moving in may not be enough it must be established as the main residence.

No need to move back in either.

 

Thank you. What does established mean? Do they carry out checks?

 

sounds like you're asking for a way to:

1) buy the IP as PPOR
2) rent it out and avoid declaring income tax on it; and also avoid CGT, i.e. tax evasion?

 

So if you had a PPOR that you converted to an IP, what do you need to do to reset the 6yr rule?

can you just be tenant free for a period and send some personal mail there to claim it's ur PPOR and then tenant it back out?

 

Id never do anything illegal, that's why I'm asking. I just know there are generally loop holes or work arounds with this kind of thing. If there isn't, there isn't and that answers my question. I'm very new to this and wasn't sure due to it been my only owned property. Most people who own an investment property also own their PPOR so I wasn't sure if it was different not owing it.

So it looks like I either need to pay all or some property gains tax (dont know enough about this yet) or buy a PPOR in a area we dont want to live in. Im just trying to weigh up the pros ad cons and which will be a better financial choice whilst not having to move the kids schools etc if pos.

 

Not having a bond lodged at OFT is a good start.

 

Yes. The ATO do check people to see if the main residence exemption was properly claimed.

 

Just move out.

No

 

this is a nice idea but here are my thoughts on some potential issues:

a deposit less than 20% attracts LMI which is not much in the grand scheme of things but does make it difficult for you to draw out equity later on.

buying where you can afford and renting where you want is fine as long as there isn't big discrepancies with the rent you are paying. For example, If you getting $400/week in rental income but spending $700/week on your own rent then you are still short on cashflow. It can argued its better to pay the extra money into your own mortgage rather than someone elses.

 

I've looked into what it takes to claim a property as your PPOR, and yes.... in addition to what others have suggested about not having it tenanted initially, you can also change your address with the electoral commission, have some utilities switched on and notify the RTA (forget its new name) that your address has changed. Obviously keep documentation.

I think the biggie is when you file your taxes in the next financial year, list that as your residential address, if not also your postal address (if you have a PO Box.. I wouldn't put your rented address on there unless you want to get into hot water).

I'm not an accountant! So please verify my suggestions with a trusted accountant and get their tax advice and see if this is legit for your scenario.

I'm pretty much doing this, but with no ill intent to necessarily evade taxes I'm supposed to pay. I bought something last year I intend to move into, but I have a few financial snafus I am waiting to resolve before I can do so. It may turn out that I need to get a tenant if it can't be resolved within the next month or two, but in the interim, I've done the above things with the intent of establishing that property as my PPOR in the eyes of the ATO. I spend about 6 months in Europe every year, so while it will legitimately be my PPOR, it will also be tenanted from time to time and I may want to sell in a few years.

On my contract of sale, it also states that I will be residing in the property, so there is also that. However, I actually do have every intent of living in this property full time as soon as I can. It isn't tenanted now because I want it unencumbered for me and having it untenanted is a small financial stress I can bear a little longer. So it is a little different than your situation. I'm not sure whether the ATO looks at this very clinically and applies the law as such, or if they care about proving an intent to mislead with regard to your never living in the IP.

Talk to an accountant. Come back and tell us what s/he says if you do, lol

 

To claim it as your main residence you need to live in it. So using the shower; sleeping their at night; cooking meals; inviting mates over; putting photo's on Facebook and just living there.

The postal address and other things are also evidence that you lived there. But I have also seen cases where their was no water consumed in the house while a person lived in the house.

Please do not try to manufacture things through paper trails. This is not a game. You can get great tax outcomes but it will mean that you will need to change your daily life and how you live.

You need to move into a property as "soon as practical". So if you are in a hospital on the settlement day that is OK; but if you just don't get around to it then that is not OK.

 

Out of interest, if you have a place with a granny flat out the back that is not a separate title (like some of the non legal granny flats in QLD), if you live in the granny flat but rent the house out, is it still classed as your home?

If not, i don't really understand how this differs from renting rooms out in your PPOR?

 

It can only be your home, if it is your home ! You can't say it is home but getting rental income.

Do not be scared of capital gain.

If you make it your home first, then move out later because you want to live elsewhere, then it will have a period where it will be CGT free as others are saying and Terry writes about.

 

Could you Eleborate on why any of this is fraud?
From my knowledge:

1 - If he buys it and genuinely moves into it first then he is by all rights allowed to purchase it as a PPOR. If 3 months later he moves out then he changed his mind. He is in all his rights allowed to do this. The only fraud would be if he claimed the FHOG as you need to live in it for 12 months.

2 - The property will likely be negatively geared so it's in his best interest to declare the income.

3 - This is not tax evasion, this is just smart. The ATO does not define in certainty what makes a property a PPOR and how long one need to stay there. They give you some guidelines.

 

The fraud is pretending to live there but not genuinely occupying.

@Ross Forrester gave the example of someone "living" in a house but not actually consuming any water.

I recall from my days of living in my PPoR I had water bills, electricity bills and gas bills.

I can't imagine genuinely occupying a house and not consuming electricity, gas and water.

 

Most people I know buy IPs and don't pay any property-related tax. And it is all legal. There is no need to do anything illegal.

CGT only applies if you sell. Don't sell. But in a trust and CGT is delayed for 80 years. Not your problem.

For most people, their first IP will be initially negatively geared. Once it becomes cashflow neutral (if not before), buy a second IP. You can keep doing this forever. There is no need to pay tax on your property income until you want to.

Cripes, I am 60 and I have never paid CGT. Last year, my property portfolio was becoming cashflow positive, especially with the low interest rates. So, I was 'forced' to buy another IP and I am retired. Now the portfolio is NG again. Now I can sleep again.

 

Just claim it as an investment property. Why be so concerned about CGT? Being able to claim all the costs and interest over the decades of ownership as an IP will likely outweigh that tax payable on sale.

Have a good read through Terry's Tax Tips and it will open your mind to the best strategy to suit you situation and goals.

 

But I am not suggesting this. My point is he in all his rights can move into the property for 3 months and then move out and it is not at all fraudulent.

If their was no plans to buy a PPOR in the near future then I would say this is the wise thing to do.
1 - You enable the 6 year exemption rule. Just imagine you purchased in Sydney 4 years ago and didn't do this!
2 - You get OO rates which can be up to .50bps lower. OK so maybe you should tell the bank you have changed loan purpose but who does that!!

The downfall is you lose 3 months of rental income and need to move twice. 6k versus 6 years of CG exemption and a lower rate?? I know what I would be choosing.