Moving out of PPOR - how to calculate eventual CGT payable ?

Considering moving out of our PPOR, wanting to consider the CGT effects of the below scenario:

How would we work out the CGT to pay on our PPOR if we have say:

- lived in it initially for 4 years and made a capital gain of $100k
- then moved into another house for 2 years, sold that and claimed the PPOR CGT exemption on it
- then moved back to the PPOR and sold it after living in it for 2 more years with a capital gain of $100k from initial purchase (I.e. it didn’t rise in value during second period of living in it)

Is the CGT simply payable on 2/8 x $100k ?

I heard there was another way of calculating the CGT, where you could get the PPOR valued when you first moved out of it, meaning the CGT payable could still be zero.

 

No,
Cost has would be the value at the date first rented and then you apportion it.

 

What Terry is saying is that when you move out of property 1 you would need to get a professional valuation.
Then when you sell property 2 you really need to work out which property has had the largest capital gain, that will be the property you claim as a PPOR for the two years, and the other will incur CGT.
You can't claim two PPOR, but you can choose which one you want to pay the tax on.
(unless my advice a few years back resulted in the wrong actions)

 

Sounds like he lived in property again after selling 2 so apportionment after this time plus 3rd element cost base expenses

 

@Terry_w what if no valuation was undertaken at time property was rented? Would it just be a pro rata apportionment of the total capital gain (between purchase and disposal) for the time the asset was non-exempt? I.e. 2/8 x $100K?

 

nope. Tax law requires market value to be reset at the date first income producing.

 

Thanks Terry. What about the scenario where applying the main residence exemption results in a larger assessable capital gain that was actually realised? Can you waive main residence exemption and just have CGT apply over the whole period of ownership? E.g. PPOR purchased for $500K, later turned into an IP (losing main residence exemption) when market value $400K, then sold still as an IP for $550K. Or maybe final sale price was only $500K, so no actual capital gain, what then?

 

Looks like you will have a capital gain.

 

So the main residence exemption is not discretional, if you live in a house it is automatically applied? Surely in practice, few if any taxpayers and their accountants in this position would actually declare a capital gain if a property was sold for the same or less than it was purchased...

 

there will be a capital gain but i think its going to be nil

You said you made the $100k gain during the period when it was a PPOR. so lets say you purchased for $500k and then when you moved out it was worth $600k.

first used to produce income rule means cost base is market value when first rented.

then you have 2 years where it is a rental and move back in for 2 years. so apportionment is 50%

but cost base is $600k and sales prices is $600k. so 50% of zero is still zero

third elements cant increase a capital loss

 

The main residence exemption is a CHOICE of which property (if there are more than one), or an absence if that rule applies etc but in reality it is less about choice and quite mandatory. s118-110 explains this in the context of the "basic case" which describes the gain or loss "IS DISREGARDED". ...This applies to either the gain or a loss if there is one.

However capital gains and losses are not optional. The issue is whether a exemption is partly or fully available.

 

Thanks Paul, bear with me. To be fully clear, if you buy a house for $500K, live in it, then move out and rent it (losing the exemption), then later sell it for $450K, you have to pay CGT if the market value was lower than $450K when you first rented it? Even though you've made an actual loss. Likewise, if you sell it for more than you bought it, but less than the market value when you first rented it, you can claim a capital loss? Crazy

 

Rex

If you purchased after 1996
see s118-192 ITAA
INCOME TAX ASSESSMENT ACT 1997 - SECT 118.192 Special rule for first use to produce income

There is no choice. Subsection 2 says
(2) You are taken to have * acquired the dwelling or your * ownership interest at the income time for its * market value at that time.

 

I have been warning about this issue in s118-192 for a number of years. A good example of those impacted could include people who purchased homes in mining towns during the boom years. eg $750K. Now these properties are worth $250K....And the jobs have contracted. So the people move on and try to rent their property and yes they face paying CGT even though the property is sold for less than the price they may have paid.

eg House sells for $500K. Tax is payable on the $250K profit which is actually a $250K loss.

I believe s118-192 should be amended so that a taxpayer may choose the higher of the market value or the property historical costbase.

Until (if) that ever changes taxpayers should be mindful that they have limited options to avoid the problem :
1. Sell within 6 years of first being rented (ie main residence absence rule) or
2. Dont rent the property (an unlimited absence rule applies) and try to sell it
3. Incur stamp duty and sell the property to a related entity to trigger a fresh costbase. (eg Mum sells to Dad)
4. Dont sell the property

 

Even under Option 4, you're just delaying the pain. If you sell for $750K in 15 years time, there will be tax payable on $500K, despite no actual gain. These are significant implications, and it's so counter intuitive that I doubt many would be aware of this before choosing to rent out their house. Me included; I moved out of PPOR and rented it out when the market value was below the original purchase price. I did consult with my accountant beforehand, and he didn't raise this as a potential issue - he might not even be aware himself? Glad I have become aware now.

I suggest a simple amendment to limit the gain or loss for CGT purposes to the actual sale price minus cost base, to prevent people being stung with a "false" capital gain, but also guard against people doing the reverse and claiming a false loss.

Probably just need a few taxpayers doing just this - the recent Sydney/Melbourne markets might create perfect conditions - buying a residence at $500K, turning it into an IP at the market peak when it's worth $1M, then selling later for $750K and claiming a loss. This will draw the ATO's attention to the issue.

 

The issue that its not actually incorrect. The growth in value while in use as an IP is still correct. However when compared to a property that is not affected by s118-192 it has a different outcome. And it seems to harshly affect only those who find the value when its first rented is less than cost. That easy to do.....Buy a place today and live in it 6 months. Value after 6 months may even be "same"as when it was bought. BUT its really not.

eh Buy a place for $550,000 + legals $2K + Duty $22,000 = Costbase $574K. But s118-192 says its $550K....A $24K difference.

There are situations a taxpayer can avoid s118-192. eg a taxpayer who has used the place for business purposes while they lived there. Or a taxpayer who reports even 1 or 2 nights or a week of income....Or a taxpayer who moved in 7 days after settling while they had minor reno works done. Or situation where they have a partner who also owns a former home. Many instances.

s118-192 is required where a taxpayer SOLELY used the home as their main residence and can claim the 100% main residence every day they lived in it. THEN rented it out.

One of the tests for a property savvy accountant is the question about costbase for a home you now rent out. Heaps of tax advisers get that wrong or cant tell you when not to use it

 

Thanks Paul. So... let's say you painted the house for the first week you owned it, and didn't move in until a week later. This would mean the property was ineligible for the main residence exemption for that 7 day period, which means s118-192 does not apply? If so, what method of CGT assessment applies?

 

s 118-185 would apply.

 

You want more of a reason than painting since you have possession and the main residence exemption can be backdated (up to 4 years !) for things like reno's....and moving from one residence to another isnt helpful since there is a special rule covering that scenario.

You want a reason to delay the issue plus then some days on top. eg illness then also being lazy. I encountered one where the taxpayer settled but the former owner was still there for 2 days and he let them take their time to get out!. Thats a good example of the main residence exemption not starting straight away....Just one day taints it. I havent seen a case but a private ruling if you settled then went on a holiday may work (?)

BUT remember this also means you cant use s118-192 later if it benefits you. But it does leave third element costs while you live there as a benefit.

Moving in

 

Is the very fact that a person CHOSE to delay moving in until 1 week (or 1 day) after settlement not enough to forego s118-192? I.e. they have elected not to occupy it as soon as practicable after settlement, and would not have to specify a particular reason for this choice?