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PPOR CGT Exemption

Discussion in 'Accounting & Tax' started by JohnPropChat, 10th Sep, 2015.

  1. JohnPropChat

    JohnPropChat Well-Known Member

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    Sorry for another question on the 6-year exemption rule but I am not very clear on a few things.

    I bought a property about 2 years ago. After settlement, the previous tenants stayed there for a month before they vacated and I moved in right after. During that tax year, I also declared the rental income and expenses for that one month. I've been staying in it till now but am looking to rent a place to be closer to the city. I plan to sell the house when the market picks up.

    1) If I move out now, do I have to get it valued? Can I not do it so that if it sells soon, the valuation will be what the seller is willing to pay and not the value for purpose of CGT?
    2) If I rent it out until it sells (assuming < 6 years) am I right to say that it'll be exempt from CGT during that time?
    3) Based on apportionment rules, I am assuming that the CGT applies to the first month before I moved in and made it my PPOR? So the ratio will be 1month: 24+ months?
     
  2. jrc

    jrc Well-Known Member

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    No to first question, because it was rented out when you first owned it. Check whether rates, insurance, interest etc that weren't able to be claimed on tax while you were living there can be added to the cost base
    yes that seems right https://www.ato.gov.au/General/Capi...ng-as-your-main-residence-after-you-move-out/
    third question seems right, but because you didn't move in asap after settlement the non exempt period will be date of settlement to when you physically moved in
     
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  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    1. yes
    2. no
    3. maybe
     
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  4. wylie

    wylie Moderator Staff Member

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    I always thought that if you don't move in immediately, it isn't necessary to get a valuation when the tenants move out and you move in because the capital gains tax would be worked out on a time basis, therefore doesn't matter what it was worth when you move in as it was an IP from the first day. Is this wrong?
     
  5. jrc

    jrc Well-Known Member

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    Terry Section 118-192 will not apply as the house was first rented out at settlement. Therefore, the value of the house when the original poster moves out is irrelevant
     
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  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    your right JRC
     
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  7. JohnPropChat

    JohnPropChat Well-Known Member

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    Thanks for that jrc.

    1) The tenants were from the previous landlord but as I used my first home grant to buy that place I asked them to vacate which they obliged and left within a month of the settlement date. Good to know that I don't have to get it valued when I rent it out next month.
    2) Happy with the 6-year exemption as well.
    3) The apportionment for the CGT exempt period is probably a small sum in the grand scheme of things.

    Interesting thought as to how I MAY be able to capitalize expenses during the time I was living in it. Is there a name to this technique?
     
  8. JohnPropChat

    JohnPropChat Well-Known Member

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    From what I understood, getting a valuation can be helpful if the value hasn't increased a lot before you move in but without a valuation apportionment rules apply.
     
  9. JohnPropChat

    JohnPropChat Well-Known Member

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    Terry, may I ask why it won't be exempt from CGT during the 6 year period after I move out and rent it?
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Because it was rented first.

    But this doesn't mean there will be CGT. Most expenses incurred while you were living there could be used to reduce CGT
    Tax Tip 26: Claim interest on a main residence against CGT on sale https://propertychat.com.au/communi...on-a-main-residence-against-cgt-on-sale.3189/
     
  11. wylie

    wylie Moderator Staff Member

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    That is not what I understand.

    My understanding is also that if you didn't move straight into the house, you cannot move out and utilise the six year rule.

    My understanding is that if you don't move straight in, you have bought an investment property that you subsequently move into, and that changes everything, six year rule, capital gains tax calculations.
     
    Last edited: 11th Sep, 2015
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  12. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    The 6 years rule stands alone. The days in the 6 years will be exempt when the time basis is used to calculate CGT later. So its possible only the first month could be taxable. Over a long term that may be trivial and would be reduced by elements of the cost base.
     
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  13. JohnPropChat

    JohnPropChat Well-Known Member

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    According to this link: https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Real-estate/Moving-into-a-dwelling/

    If I want a property to be considered as my main residence, I should move in as soon as practicable. What I don't understand is, can it not be a main residence later on if it was first rented out when bought? How is the main residence in the former case different to the later case in the context of the 6year rule?
     
  14. chylld

    chylld Well-Known Member

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    I almost rented out my new PPOR for 12 months to save about $15k... glad I moved in straight away now
     
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  15. JohnPropChat

    JohnPropChat Well-Known Member

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    Would it matter, if the intention was there? I used first home grant to buy the property. I notified the agent to ask the tenants to vacate before the settlement date and moved in as soon as they left?

    It's either that or getting it valued for CGT before I move out so that I can get most of the CG exempted as I don't believe it would go up by much before it sells and even if it did, I can use the cost base(plus expenses during use as main residence) to offset any gains. A few questions though:

    1) Assume I get it valued before I move out. If the cost-base + exempt cgt is less than the sale price. Do I get to keep the capital loss for future?
    2) If the final sale price(if sold in the next 3 to 12 months) is more than 10% of the CGT valuation, will the buyer have trouble getting his loan approved?
     
  16. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    A tenant occupying the premises is not practicable. If you were delayed due to a holiday, moving from interstate, then the date of acquisition is deemed to be the occupancy date. Tenancy is not accepted. https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Real-estate/Moving-into-a-dwelling/


    Valuation isn't correct as the taxable period prior to occupancy severs the special rule applying to valuation when a property FIRST earns income..

    Some losses can be carried forward. Note that when a loss occurs some CGT cost elements may be excluded.
     
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  17. JohnPropChat

    JohnPropChat Well-Known Member

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    It indeed looks like the 6 year rule stands alone. I just used the CGT calculator tool here: http://calculators.ato.gov.au/scripts/axos/axos.asp?CONTEXT=&KBS=CGT_and_real_property.XR4&go=ok

    and punched in all the numbers. If I sell in December this year then I should declare 3.4% of my CG however, if I sell in 2018 then have to declare 1.4% which tells me that the first month before I moved is what is being used for CGT. One thing that wasn't clear is the question "absence from main residence" does that also include renting it our or just leaving it vacant? As there was no other place where it asked if it was producing income during that absent period?

    Terry, this seems to be contradicting what you suggested. Did I forget to include something?
     
  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No, that sounds right. Just remember there will probably be no tax payable in this situation even though it will be a CGT event.

    The property can be rented for upp to 6 years and be your main residence still. If left vacant the time period is indefinite.
     
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  19. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    These small periods are generally of trivial tax value. The upfront ownership costs like duty and legals and selling costs + exempt periods + spouse splitting + the 50% CGT discount generally mean most taxpayers over budget CGT and are often surprised when a final calc is done.
    The exception to theat view is the cost base adjustment for some properties where depn and cap allowances have been claimed. That issue can come as a surprise to some taxpayers and the clawback can up the CGT cost.

    Yes - I saw the CGT calculator tool today and quickly looked at it. Not bad but its only as good as the taxpayer entering the numbers.

    Here are some of the CGT cost base items / examples:

    • Property + Land Purchase Price
    • Land - Purchase Price
    • Building Construction

    Acquisition Costs - Do not include any costs for which a tax deduction has (or will) be claimed
    • Legals fees to acquire
    • Buyers Agent
    • Broker (not loan broker)
    • Auction fee charged to buyer
    • Valuer / Surveyor
    • Transfer of Title - legals
    • Stamp Duty less FHOG
    • Search fees on acquistion
    • Bank title fees
    • Mortgage discharge fees charged to buyer

    Costs of Ownership - For which a tax deduction has never been claimed
    • Interest
    • Rates
    • Land Tax
    • Repairs & Maintenance
    • Initial repairs & later capital improvements :
    • Insurance (Building only)
    • Fencing
    • Landscaping and horticulture
    Costs to Preserve Ownership (where no dev occurs)
    • Rezoning
    • DA Fees
    • Survey boundary
    • Councile fees
    • Subdiv costs prior to subdiv sale
     
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  20. wylie

    wylie Moderator Staff Member

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    Are you saying that I could move into a house I've rented for nine years, and it becomes my main residence. Say I bought it for $100K and it is now worth $500K. If I sold the IP I would halve the gain of $400K (adjusted for cost base - but let's ignore that for now). I would add $200K to my income for the year of the sale.

    My reading of the answer above is the opposite to what I've always understood to be the rules.

    So... say I sell my main residence and move into my IP that I have owned for nine years that is worth $500K. I do a $500K major renovation and it is now worth $1.5M. I live in my $1.5M house for one year (total ownership now ten years) and then decide to sell it for $1.5M.

    How is my gain taxed?