How to reduce CGT bill when selling a high equity IP

Are there any good strategies when selling an IP held for 30 years with lots of equity.

I have 30k left on the loan and it will sell for about 1.3m. It was my ppor from the time I bought it in 1991 for 92k until I vacated a few years later, when it then became an IP.

I don't recall the exact date I vacated, perhaps I can fudge this date and say I stayed there longer to increase the cost base.

Of course it's now +ive geared and probably sounds crazy to sell, but I want to give my parents 200k as a gift and put the rest into penny stocks and ETFs etc.

I do have some shares that I can sell now for a $50k loss. I imagine it's better to crystalise the loss on these shares before I sell the IP so I can use the capital loss to offset the capital gains.

Are there any other ways to reduce my tax bill when I sell this IP? I want to sell early next year.

 

Sell for a bargain price.

 

Is refinance to cash out equity instead an option?

also is there a non residency issue in your case?

cg is not related to equity or loan.

 

I don't know what to tell you, you make money you pay tax. Wanna pay less tax make less money.

Unless you've got carry-forward losses, there's not much you can really do to increase your cost base.

 

Tax Tip 119: How to Reduce CGT on Investment Property (Part I) Tax Tip 119: How to Reduce CGT on Investment Property (Part I)

 

you could consider the six year absence rule and the impact of that on another main residence you may have had after that time.

use of personal super contributions and the use of any unused concessional super contributions for the past five years depending on your total superannuation balance.

potentially a superannuation contribution reserving strategy if you have an smsf.

if the property is held in joint names this benefit may be able to be "super" charged.

also get a professional valuation as the cost base will be reset to market value when first used to produce income.

 

Depending on age the super downsizer rule may also assist future tax savings witn the funds.....Tax is inevitable but how you use the proceeds can affect future tax. Also watch out for the add ons like medicare levy surcharge if you dont have private health as you will have a signiifcant boost to taxable income. And Div 293 tax which will affect tax on contributions made by a employer. Just expect that and it can be paid out of the fund.

Q : Any impovemnets or other changes to the property where you didnt claim a deduction.?

You will need to determine the date you started to rent it. This is often noted in a replacement property purchase or some other event at that time (ie rental scheudle if you have copies of those old returns). Then you will also need reliable dates for any main residence after that time to determine merits of the 6 year rule etc.

Be wary of gifting $200K to parents without understanding how this could affect their pensions. If they receive or could receive one.

Other than the ideas sugested by Mike CGT is fairly inevitable and the tax may be as much as 24% of the profit. Invest in tax advice ? Even just to check and validate the final amount isnt excessive (or incorrect)

 

I'll give you $200k for your parents, and another $200k for some penny stocks & taxes.

All sorted.

 

That isnt as silly as it sounds. Is selling the property a necessity ? It may defer the CGT issue altogether to not sell and instead to seek equity release. None of that loan split will be deductible for the parents % but the loan split for shares etc may be. The +ve cashflow means servicing and equity make it easier for approval.

Depends really what the plans are for the net equity.

 

Unfortunately refinance is not an option because I don't have a job so the banks won't lend me anything. I am unemployed and live off rental income.

No, luckily I dodged that bullet and made sure I was never considered a non-resident for tax purposes.

I think a capital gain occurs when you sell an asset for more than you paid for it, so the amount of equity and remaining loan determines how much capital gains occur when I sell.

 

Thanks Terry, that covers the main things I can do: sell in a low income year, make sure I crystallise any capital losses by selling losing shares before I sell the property, and make deductible contribution into super where possible.

 

Thank you Mike, great advice. I wasn't aware of the 6 year absence rule. To clarify: I have never had, or claimed another ppor since I moved out of this property as I've always rented since then.

So this 6 year absence strategy allows me to increase the cost base because the property is valued at a higher amount, i.e. buy ppor for 92k in 1991, live in it for 2 years then move out in 1993. I then claim 6 year absence from the time I vacated in 1993, so my cost base is now the value of the property in 1999, even if it was rented between 1993-1999?

I only have 50k in super as I haven't been employed since 2001. So after selling, can I deposit, e.g 300k of the proceeds into my super fund then access it tax free when I turn 65yo (I'm 50yo now)?

I believe I can contribute up to 27.5k per year into my super as a personal contribution and claim as a tax deduction.

Actually I've got no idea and will read up more about super.. I don't know what concessional contributions are or what the limits are.

I don't have a smsf, just a small 50k balance with HESTA.

Yes the property is held in joint names, both my parents and myself. My parents went guarantor back then so I was able to get a loan as I'd recently started working.

I paid the deposit and loan repayments entirely by myself, but over the past 30 years my parents have declared their 66% portion of the rent and also claimed their % of the outgoings. At the end of each FY I give them some cash to reimburse/compensate for taking the hit.

My parents don't get any govt pension, they live off a small pension fund provided by their super. So when I sell this property I guess they will also have to pay CGT on their 66% portion (which I'll pay on their behalf).

OK I will get a professional valuation - and the aim is to get it as high as possible after claiming the 6 year absence.

 

Thanks Paul, I will also get advice on how best to use the proceeds to help minimise the tax bill. I think super is the main thing I can do, but not sure if my parents can do the same with their portion of the proceeds. I currently don't have any private health cover.

I think I've claimed everything I'm entitled to over the years. I got a depreciation schedule done in 2014 and just noticed on the cover it says "This property was first available to let on 01/07/2010". The property is a 120yr old house which I renovated in FY 2015 for 40k. I also renovated it around 1992 when I was living there. My 2019 tax return shows $780 for capital allowance assets and $1600 for capital works deductions.

I rented elsewhere when I moved out of the property in 1993, I guess it would be called rentvesting these days. I have never had another ppor so hope I can utilise the 6 year absence rule to increase my cost base.

Thanks, I'll get advice about this before gifting them anything. They don't receive any govt pension, they have just a small income from a pension fund provided by their super.

 

I would love to release some equity but don't qualify for a loan.

 

You misunderstood the 6 year rule. Cost based is reset at market value when first income producing and then apportioned

 

Interesting read and good info thank you

We are considering to sell an IP. That will trigger CGT
Prop is under one name. Bought in 2013 so cost base is set and no 6 yr absence rule will apply, never lived and won't be able to due to the location.

After paying off the outstanding loan, agent fee n charges, other exps, spliting 50% as held for longer than 12 mnts...we may have to pay CGT on approx 230-240K.

Interestes to know more about that 200K gift and Super cont that how much it can be reduced!!

So

 

Would you just have to do that in the same financial year that you had the CGT event
e.g. $27500 x 5 years= $137500 that you would only pay 15% tax on when it goes into the super fund ?

(vs having to pay ta at your marginal tax rate)

 

The idea is to reduce your taxable income as this would reduce the amount of tax you pay. Making a deductible contribution to super reduces your taxable income.

 

Many arent aware they can be eligible for catch up contributions. And you do need to be cautions of caps (limits) which can impose penalties. The cap includes employer contributions etc. Of course super is then preserved but the low tax rate of 15%-30% on contributions is less than the personal benefit of the deduction at a higher marginal tax rate. You have until 30 June 22 to consider this.

 

Yes