Investment Property Conversion

Hi All,

I've been trying to find resources about this online but everywhere says something different so I was hoping you'd be able to help.

I bought an investment property 12 months ago in NSW and immediately rented it out. I am now considering if there are any benefits to moving back in (for 6-12 months before moving out again) and claiming it as a PPOR for that period in order to apply the 6-year rule. If I did this, does that mean I would have CGT benefits when selling (let's say in 5 years), even if I only lived there for 6-12 months? Or is it a pro-rata rule where I will only get the benefits for that 6-12 month period?

Thanks in advance!

 

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/

 

Tax Tip 233: The 6 year rule when moving into an IP and then out again Tax Tip 233: The 6 year rule when moving into an IP and then out again

 

Thanks @Terry_w those links are helpful.

So in my situation these are the timelines:

• Bought investment property (let's say $1m) - December 2020 --> Immediately rented it out
• Moved in January 2022 til July 2022 --> PPOR (Six year rule will apply til 2028)
• Moved out July 2022
• Sold in December 2027 for $1.5m

Does this mean CGT would only be applied for December 2020 til January 2022? And what are the typical allowed reasons for the 6 year rule to apply? Can I move out after 6 months just because I want to or do I need an approved reason?

In addition, is there a minimum stay time (eg, 6 months) needed to convert to PPOR?

Thank you again for the help!

 

No its on the full ownership period and then apportioned.

no reason needed.

no minimum period in legislation

Its the 'main residence' CGT exemption, not PPOR.

 

No. IF you are able to use the full 6 year absence then

1. The costbase may be enhanced by third element costs for the period you lived there for ownership costs you cant claim a deduction for ; and
2. The CGT exemption (days) starts in a date in Jan 2022 until July 2022 PLUS a further 6 years aftre July 22 when you were absent.

I see no issue with a preliminary occupancy of 6 mths.

The final gain is apportioned based on taxable days divided by the ownership period after also allowing for selling costs etc Then half is only taxable. It will always have a taxable period for at least the initial period but that will dilute over the period owened. The longer the smaller that ratio becomes.

Consider where you lived while absent too. Another property cant also be exempt EVEN IF owned by a spouse / partner. It affects them and you.There may even be a choice but that will impact the other property. If yu merely rent etc that may not be a concern. Seek advice

 

Does this mean theoretically I could just move into my investment property for one week, claim it as PPOR, then move out again and have 6 years main residence CGT exemption from that point? I thought that you needed a legitimate reason to move and if audited you may have issues?

Apologies - both of you have mentioned "apportioned". How does that calculation work exactly in this scenario? Ie, $500k gain on property at sale, and the taxable component would be the $500k multiplied by the portion on which it was not a main residence? Ie, $500k x 1/5 so $100k taxable?

 

perhaps have a look at the source - the law

s118-145 ITAA97 for the 6 year rule INCOME TAX ASSESSMENT ACT 1997 - SECT 118.145 Absences

s118-185 ITAA97 for apportioning INCOME TAX ASSESSMENT ACT 1997 - SECT 118.185 Partial exemption where dwelling was your main residence during part only of ownership period

 

Many people also ask questions about using valuations to apportion profit. As Terry indicates, such a basis isnt correct. Instead the formila is s118.185 is to be used which apportions based on time in days. There are very few instances when a valuation is involved with CGT. Death, transfers for less than market value and a initial valuation when a home that has been 100% exempt is then first used to produce income are examples.

 

Despite there being no minimum period required, I imagine you would have an extremely hard time trying to convince the tax office that you genuinely established the IP as your main residence for only a period of 1 week

 

I have seen a example of a mere one night. A soldier who moved in. That night at work he was ordered to deploy interstate and then a tour of duty. We keep a copy of the orders. A very short period should always consider the purpose and reasons and evidence that can support the issue. To avoid a concern.

 

Agreed. If circumstances outside of the taxpayer's control arise and force them to relocate then a case could be made but I think OP assumed that by (figuratively) sleeping in IP (not necessarily occupying it as a MR) for a week then moving out would be enough to start MR absence timer

 

Part IVA could also potentially be deployed too

 

The key point the ATO will attack is - Did the property commence to be used and held as a main residence and was it intended to be a main residence rather than a mere occupation. The issue of intent isnt mentioned in any law however a common law view applies to a main residence. If you intended to move in and move out then was a main residence established ?? Certainly not occupying it poses a fatal issue (Couch, Gerbric decisions) but furthermore issues surrounding artificial and contrived efforts to seek to claim the exemption require the TAXPAYER to satisfy the onus of evidence and avast array of issues can be involved. Some will say - Change your license and electroral address but that doesnt in itself mean much. The best evidence is actual occupancy with evidence of habitation and all possessions. TD51 is vague on what IS a main residence as the substance and form may vary. The ATO lists "some" factors they may consider which are not the sole reasons and issues. Andas they explain "but not limited to"....

https://www.ato.gov.au/law/view/document?locid='CGD/TD51/NAT/ATO'&PiT=20061129000001

The ATOs website also contains a different view;
Generally, a dwelling is considered to be your main residence if:

• you and your family live in it
• your personal belongings are in it
• it is the address your mail is delivered to
• it is your address on the electoral roll
• services such as gas and power are connected. The length of time you stay in the dwelling and whether you intend to occupy it as your home may also be relevant. The dictionary meaning of home is important here as a dictionary usually refers to duration or some use the expression "live" which differs from a "stay" eg permanently. But permanent doesnt mean forever in common law either. So a intention to stay a prolonged period may merely suffice. Having reason to change that view may support a "change of intention" rather than a plan to depart.

Thats a different concept as this is the only place "home" is mentioned. The law doesnt even say that. But thats the Commisisoners perogative to read its view into uncertain law.

One of the side rulings to also consider is TD 92/135 which hold that a property used to produce isolated profit isnt a CGT asset. It can never commence to be a main residence for that reason. eg You buy to renovate and sell. You live there. Its not a main residence according to that ruling. Then there is the spouse and family rule which can affect how much can be exempt. Then TD 1999/69 also affects what the CGT asset is that is a "dwelling"... eg You cant pitch a tent on land.

s118-135 ITAA is also relevant. ""Moving into a dwelling"" If a *dwelling becomes your main residence by the time it was first practicable for you to move into it after you acquired your ownership interest in it, the dwelling is treated as your main residence from when you acquired the interest until it actually became your main residence.”
Note it says if and doesnt actually say that when a person moves in its now a main residence. The law contains two limbs. So a owner must move in as soon as practicable and also as a main residence for the exemption to commence.

The true test is therefore satisfying the Commissioner. A binding private ruling can be a wise choice to avoid penalties for evasion for avoidance.

Its less likely the Commissioner would consider Part IVA vs the facts on their view concerning exemption. A audit decisoon to amend is far easier than a Part IVA determination and far easier to address on appeal as a taxpayer issue not a Commissioner issue.

 

Scarily even some tax accountants refer to obtaining multiple valuations for CGT purposes as you move in and out of an IP per the below podcast.
The incorrect reference is multiple times in this podcast to both multiple valuations and the cost of obtaining multiple valuations (I double checked I hadn’t misheard) so suggest PC users ensure they obtain quality tax advice.

http://www.theelephantintheroom.com.au/ep-116-alison-lacey-property-taxes-101

 

Link doesn't work now, maybe they have taken it down after reading this.

 

Why is that scary ? I believe it is perfectly acceptable. Market value is not a number. It is a range. It is the taxpayer choice to use the higher or lower of a range and specific property or comparable property data may correctly or falsely influence this. . The taxpayer also may consider the more favourable valuation methodology. I use an example of valuation as a apartmnet developmnet site v valuation as a freestanding house site. A taxpayer would be mad not to use tax law to their advantage. It is the taxpayer CHOICE. Tax law contains may areas where taxpayers can elect or choose things. This is another one. This is all explained in the ATO guide to valuations. That said chasing false valuations may be a concern and they should be based on sound professional practice and data that is objective from suitably qualified people. I also tell people you want to tell the valuer you want a high or low value....They will assist to the extent they can. Each $10K of difference could reflect as a possible $4700 extra or less tax. Sometimes people use multiple valuers (3 is common) and take a average. That is common for a disputed value that may need arbitration.

However if a tax adviser suggests using multiple valuations to span periods of time that is a worry. More likley warning sign of porrproperty tax advice...Or like many podcasts or blogs perhaps they arent qualified. Certainly not experienced.

 

Sorry @Terry_w try again (their auto link didn’t work)

Episode 116 | Property & Taxes 101 | Alison Lacey, Ecovis Clark Jacobs — The Elephant in the Room

You’ve misread there @Paul@PAS multiple valuations at various times as property changes from IP to PPOR and back again.
A Director of a Sydney accounting practice.

To save listening to the whole podcast;

“Alison Lacey: The other way people often look at capital gains. Two is a valuation points. So I bought it for this price. I rented it for five years for instance. And it was valued at, at the end of that five year period, you get a valuation so that growth period is subject to capital gains. Then you move into it and it's a print out of the way to calculate it.”

And again when considering upgrading the MR (PPOR) and potentially keeping the original property (starts ok):

“Alison Lacey: Yeah, depends. We would probably look at which house rather than the first house. Which one has the most capital gain on it during a period? So I would get valuations at the time you moved. So you had them up your sleeve or later? Indefinitely really. I guess you could have that first house as your principal place of residence, but if you rent it now you can't because if you rent it out then it's a rental property subject to CGT. So yeah. So you would move your second property would then become, because if that's where you're physically living, that's your principle place of residence.”

No mention of 6 year rule (if applicable) or that taxpayer could have a choice of MR exemption.

 

If you rent a property out that was formerly exempt the valuation at that point resets market value as of that date. If you move in again and later out again you don't get a new valuation opportunity as it would not be fully exempt at that point.

If you move into a rental property you cannot even use a valuation.

Therefore I don't know what is meant by 'two valuation points'

 

Neither does the ATO. Thats not what s118.192 and s118.185 indicate. And yes then there are uses of exemptions which may influence s118.185 and its formula that apportions using TIME as the basis.