Join Australia's most dynamic and respected property investment community

CGT on Residence

Discussion in 'Accounting & Tax' started by T-Trade, 11th Jul, 2015.

  1. T-Trade

    T-Trade Member

    Joined:
    11th Jul, 2015
    Posts:
    12
    Location:
    Melbourne
    First post on the new forums!

    I've just sold the house I live in (House 1) which I've owned for 18 months and lived in at all times. I'm also selling my former PPOR (House 2) and, for CGT purposes, will use the 6 year rule to treat House 2 as the CGT exempt asset given gains are much greater.

    I therefore need to pay CGT on House 1.

    My reading of the ATO's guidelines are that I can add any council rates, insurance and loan interest paid since I've owned House 1 to its CGT cost base. https://www.ato.gov.au/General/Capi...l-gain-or-loss/What-is-the-cost-base-/?page=2

    I wasn't expecting this extra generosity! - keen to get other's views on whether this is the correct interpretation.
     
  2. Magnus

    Magnus Member

    Joined:
    8th Jul, 2015
    Posts:
    8
    Location:
    Saskatchewan
    Yes, I believe that as long as these costs have never been claimed as deductions you can add them to your cost base.

    After all, if the property was a rental you would be able to claim these costs against the income earned. Seems only fair that you still receive some benefit even if you aren't using the property to produce income.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    9,012
    Location:
    Sydney
  4. T-Trade

    T-Trade Member

    Joined:
    11th Jul, 2015
    Posts:
    12
    Location:
    Melbourne
    Thanks Magnus & Terry.

    It's an interesting outcome that doesn't really make sense from a policy standpoint and why I was uncertain - I can get the benefit of 50% tax deductibility on interest/rates/expenses on my residence (House 1), thereby lowering CGT quite materially, and also have full deductibility of the investment property (House 2) and CGT exempt status. Without even realising it - a very efficient structure.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    9,012
    Location:
    Sydney
    Yes its unusual to be able to claim costs while it is a main residence. Perhaps they didn't think of this when drafting the legislation.

    Its a great strategy for investors though.
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    9,012
    Location:
    Sydney
    BTW, I would be interested to know how much you can reduce the CGT for by using the s110-25 costs to reduce the cost base.
     
  7. T-Trade

    T-Trade Member

    Joined:
    11th Jul, 2015
    Posts:
    12
    Location:
    Melbourne
    In my case, I've sold a property for a headline price 13% above the auction price I paid 16 months ago. With 5.5% stamp duty, 1% agent's commission, $3k of rates, some small costs and 100% loans to finance it @ an average cost of around 4.45%p.a. over the 16 months, I've come out with a very small assessable capital gain - so basically wiped out the 6.5% on top of stamp and agent's commission that would otherwise have been assessable.
     
  8. Jaik2012

    Jaik2012 Active Member

    Joined:
    19th Jun, 2015
    Posts:
    42
    Location:
    Sydney
    I'm not sure if am missing something here. Isn't PPOR exempt from CGT?
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    9,012
    Location:
    Sydney
    Not always.
     
  10. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,392
    Location:
    Sydney
    It can be reduced to zero. You cant create a loss in most cases. A compulsory acquisition (ie road widening for a IP) may be exempt too.
     
  11. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,392
    Location:
    Sydney
    Like Terry said. Not always. But in this example it actually still only applies to one home...Not the one he still lives in. Through the use of the absence rule two homes meet the exemption but only one exemption is available. Its possible for some taxpayers to satisfy the MRE for more than one property (maybe even three but it would be complex). The taxpayer is permitted to choose which they apply CGT to. Obviously they "elect" the least cost. The election is made by preparing and lodging the return. No special forms.
     
    Jaik2012 likes this.