IP to PPOR CGT implications

Discussion in 'Loans & Mortgage Brokers' started by Salguod, 22nd Jul, 2017.

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  1. Salguod

    Salguod New Member

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    Long time reader, first time poster.

    I've searched and found useful information, but not quite specific enough to my situation.

    I bought my first unit in 2014 and immediately had tenants in it for the 12 months. So it was classed as IP for that period and I understand the CGT implications.

    After 12 months of owership, I moved in and made it my PPOR. Now, my job may require me to move to a regional town and if that's the case, I will be renting.

    If I now move out, can my unit stay as my PPOR for tax purposes, and 6 year main residence exemption for capital gains tax apply? I understand I will still be liable for CGT from the first 12 months of ownership.

    I guess what I'm tryint to get at is:

    First 12 months of ownership with tenants in place - > IP (CGT applies)
    Move in for two years - > PPOR (CGT does not apply)
    Move out and put tenants in - > Remains as PPOR (CGT does not apply, 6 year main reisdence exemption)

    Would this be correct?

    Just after your thoughts.

    Thanks
     
  2. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    Yes the 6 year rule can apply.

    in your example if you sold it 2 years after moving out again you would be subject to CGT on roughly 1/5 of the gain, then the 50% discount = Rough.
     
  3. Salguod

    Salguod New Member

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    Fantastic, thanks for the quick response.
     
  4. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    The cost base for determining CGT will be the original cost. Some people can use market value when a property first produces income AFTER it has been their home but as it was rented for the first 12 months this option isnt allowed. What its "worth"wont factor into how to calculate profit that gets apportioned .
     
  5. willfong

    willfong Active Member

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    Expanding on this question if you guys don't mind. What if the OP makes significant renovations during his stay as PPOR which increases the value. Can he get a valuation just before moving in and only pay cgt on the difference between cost base and that valuation or will the cgt be based on the sale price difference multiplied by the period that CGT is applicable for.
     
  6. Marg4000

    Marg4000 Well-Known Member

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    If the property rented first, cgt will always apply and valuations not taken into account.

    As far as I understand, renovation costs will be added to the purchase price to adjust the cost base.
    Marg
     
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  7. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    Marg is right!
     
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  8. willfong

    willfong Active Member

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    Thanks Marg and Terry.
     
  9. Oscar123

    Oscar123 Member

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    Hi guys - just to follow up on this thread.
    I've read several places that say if the property is used as IP first, then the 6 yr CGT exemption does not apply regardless of whether or not you make it a PPOR in future years.

    Is this correct?

    If correct, then in OP's case he would not be able to classify his property as PPOR after moving out and putting tenants in, and as such only be CGT exempt for the 2 years he lived in the property?
     
  10. Mike A

    Mike A Well-Known Member

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    Not correct. If the property was your main residence you could use the 6 year absence rule after the property stopped being your main residence.

    It would however be subject to partial cgt for the period prior to it being your main residence (the initial ip period)
     
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  11. Oscar123

    Oscar123 Member

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    Thanks @PropertyTaxSolutions! Just to clarify, the fact that you had initially designated the property as IP does not stop you from claiming the 6yr exemption later?

    I always thought the cgt apportionment was percentage rented vs. resided, which in OP's case would be all the years except for 2yrs.
     
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  12. Mike A

    Mike A Well-Known Member

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    section 118-145 says

    (1) If a * dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence.

    doesn't say anything about the intention of the property. doesn't say anything about previous usage. it merely says if it was your main residence. if you moved in and made it your main residence at some point of time it is eligible to use the absence provision after you moved out for that period of time onwards.
     
  13. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    For what its worth i agree with PTS.
     
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