CGT strategy for retirement

Happy New Year!

Just a question on how CGT will be calculated in the below scenario. Apologies if this is a trivial question, I am not very financial savy.

My wife and I (we’re in mid 40s) have a very small superannuation balance, that will only probably last us about 10 yrs into retirement. We have a PPOR that will get paid off before we retire.

So we will have to inevitably sell our PPOR to fund our living. However the thought of being able to pay rent is scaring us. Hence we want to buy a low maintenance smaller sized IP now, so that when the time comes to sell our PPOR we can move into the IP and hopefully the IP has also built some equity.

Question: What happens to CGT when we eventually sell the IP? Given it will be rented for atleast 20 years and then become a main residence, will CGT be calculated based on the % of total time of ownership vs when it was an income generating asset?

Question: Is there a better strategy to minimise the CGT on the IP (later to be main residence)? I have heard of using SMSF to buy the IP, but I am worried that SMSF management costs may be too high.

Thanks!

 

CGT will be based on the % of time it was not the main residence.
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/


If it is the main residence of the owner at their death, and was not income producing all CGT could be essentially wiped out.
Tax Tip 241: Leave your children 2 properties CGT free on death Tax Tip 241: Leave your children 2 properties CGT free on death

 

Thanks Terry!

I learnt something new today - Any CGT in the investment property will be wiped out if it is the main residence of the deceased (s 118-195 and s 118-190 ITAA97).

What about if the IP was joint titled as a couple and one partner dies? Will CGT still get wiped out?

 

Each has separate interests. So one might inherit and their share might have cost base reset and later the other will die and wipe out the rest

 

JazzyOnline,

Also remember that CGT is applied at your marginal tax rate at the time the CGT event occurs.

From your post it seems you would be triggering the CGT when you are retired and have little other income.

So say you bought the IP in 50/50 names between yourself and a partner and then sold the IP with a $200k capital gain (after holding for at least 12 months) you’d each be paying tax on $50k at your marginal tax rate. If you had little other income at the time you’d be paying about $12-13k tax on the $200k CGT.

This is a simplified explanation but shows that the CGT isn’t probably a huge deal if selling in retirement.

Regards,

Jason

 

What IS the plan to derive an income in retirement?

 

Oh wow, great to hear about this rule.

Terry, how about foreigners or at least non tax residents? Does this apply to them as well?

Also, what about non-strata unit block (1 title), just live in one of the units and declare that unit as PPOR, while renting out the rest before passing?

Thanks in advance.

 

A non-resident for tax purposes cannot generally claim a property in Australia as their main residence. If they die while a non-resident their former main residence cannot qualify as their main residence for tax purposes.

Strata doesn't change anything really. If living in say a 6 unit block and renting 5 units only 1/6th of he property could be the main residence as the property is income producing.