Capital Loss - Turning rental property to PPOR

Hi all,

So we bought a property in 2017 with total cost base (inc. stamp duty etc) of about 715k. Since then we turned into a rental property.

Now we’re thinking of moving in a months time, say Oct 2019. The property’s valuation is say 615k (yes it hurts). We’re thinking of staying long term say 8 years, what would be the final tax loss/gain if we do sell in 8 years time at say 815k as an example.

My understanding of situation are below:

As at Oct 2019, capital loss of 100k
The profit of 815k-615k will not be subjected to any CGT since it is our PPOR from 2019 to 2027.
Hence, does that mean we will have a capital loss that we can claim of 100k in 2027 after we do sell?

Thank you.

 

what was the market value of the property when it was first used to produce income ?

if the value was around $615k and you sell for $815k that sounds likes a $200k gain to me in future.

 

It was used for rental purposes straight away after purchase (3 weeks after). So in this case 685k?

 

ok cost base will be market value when first used to produce income. $685k.

if sold for $815k you will have a capital gain of $130k.

your understanding of how it works isn't correct. there are some strategies to consider to mitigate that impact.

 

bit confused now actually. it was first used as a rental property and then you lived in it ?

 

Yes correct Mike. Moving in a months’ time.

 

In summary
2017, bought as IP, 715k, rented out day1.

2019 move in as ppor, market value 615k.

2029 sell at 815k.ppor from 2019 to 2029.

How is cg calculated? Ip then ppor.

 

Yes thank you Trainee

 

ah ok understand. thats different.

cost base will then be the original purchase price being $715k. If you sold for $815k you have a $100k capital gain.

the relevant gain is then calculated by the number of days it was not your main residence / total ownership period

INCOME TAX ASSESSMENT ACT 1997 - SECT 118.185 Partial exemption where dwelling was your main residence during part only of ownership period

 

I just saw this article CGT after moving into investment property : Mr Taxman

"The simplest calculation of the capital gain would be to use an official valuation (by a registered valuer) at the time that he moved in four years ago to determine the growth of the property whilst it was an investment."

It looks like there are two ways to calculcate CGT, one is through a valuation to determine capital gain during years where it was used as an investment vs the other which is pro-rata per your method.

Still confused whether we can use a licensed property valuation to calculate CGT or it is just strictly pro-rata.
Can anyone else shed some light here?

 

You cannot use a valuation.

This would only apply if you moved out of the main residence and rent it. s 118-192.
What would apply in your situation is s118-185 itaa97.

 

its one of the issues scouring the internet without understanding tax law

Mr TaxMan is not correct in his article in 2011. he states that "In absence of any official valuation, he can pro-rata the capital gain made between the time that he rented the property out (4 years) and the total length of time that he holds the property."

I know Mr TaxMan (Adrian Rafferty) so will bring this to his attention.

You can't use an official valuation unless you first lived in the property and then used it to produce income

One of the responses by Alan Travers raises this issue

""In this situation my understanding is that because the property was first used as a rental property, and then became the person’s residence, the days of ownership method must be used to work out the CGT payable - not a valuation as you have suggested. Is this correct?"
By: Allan Travers on Jan 13, 2015 6:50AM"

i dont take on new matters for simple affairs but you could contact @Paul@PFI who is taking on such matters. He also offers a free initial consult so I would take advantage of that to discuss the issues.

 

Two things, op:
Its important to ask questions clearly.

Check your sources. Why would you believe a website over the actual legislation?

 

Thanks all. Having said that, can I add the interest expense that I incur to the cost base when I move back in to the IP?
So for example, if interest expense is 20k per year. In 8 years, can I add 160k to the cost base - hence 160+715k?

 

the 3rd element cost base expenses can be used to reduce cgt.