Primary residence to investment property

Discussion in 'Accounting & Tax' started by rms87, 5th Jun, 2019.

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  1. rms87

    rms87 New Member

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    Hi,

    May have been asked before but couldn't find any info.

    Yes I know I should speak to an accountant, and I will, but wanted a quick answer.

    I bought my primary residence in 2015 for $360k. Market has dropped considerably since and the current valuation is ~280k. I am leaving town with the intention of converting my property to an 'investment' property waiting for the market to recover.

    Lets say the value recovers to $330k over the next few years. If i were to sell at $330k, would I then owe capital gains on $50k, given the valuation when it became an 'investment'? Or is there some sort of fine print in the case that the valuation dropped since buying it. Having to pay capital gains tax on a loss doesn't feel like the intent of the capital gains 'exemption', but the writing on the ATO website doesn't specify any variations.

    Thanks in advance,
    Rohan
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    costbase is reset to market value at the date it is first income producing = $280k so yes more CGT payable.

    There are no concessions for drops in value like this.

    But you might be able to use the 6 year rule to keep it exempt.
     
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  3. rms87

    rms87 New Member

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    Thanks for your response
     
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  4. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Hang on....There may be a smarter way.

    s118-192 says you must revalue the property to market value at the time it is first used to produce income if its always been your main residence. Mike and I have been discussing this very issue in the past two days and there is a option. Its rarely seen but the recent falls in value open a option.

    Let me explain.

    The main residence is a ELECTION. Its not mandatory. If you choose the MRE in this example you would be treating a LOSS as a exempt loss...Makes no sense ? Instead DONT use the MRE and then s118-192 isnt applicable since s118-192 (1)(b) isnt met. So the costbase remains its historical costs AND you can add in 3rd element costs for the period you used the property for private purposes. There is no requirement that says a MRE must be claimed.

    So you can use one election for two different taxing laws :)

    This issue is coming to light for the first time since property values are off their highs. It requires a different way of thinking.
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I don't think there is a choice on whether or not to count a property as a main residence, unless you count other property. it is a question of fact.

    the legislation doesn't give a choice under s118-110
     
  6. Trainee

    Trainee Well-Known Member

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    But is there a section that deems the place you live in to be a ppor unless you declare somewhere else to be? Ie is it allowed to have no ppor?
     
  7. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yes that needs to be considered. As may even a single night of income or using the property as a place of business. Or being unable to move into the property when it is first acquired "as soon as practicable"...Is that several days, several weeks or months ?

    Its better to seek one of those first if available, then the absence rule (6yr usually), then s118-192

    Too often its a an assumed issue and facts need to be explored.
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    s 118-110

    upload_2019-6-5_12-23-8.png
     
  9. rms87

    rms87 New Member

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    Does the 6-year rule basically make me exempt from CGT on the original dwelling, unless I buy and move into another house which therefore becomes my primary residence?
    But I could rent etc. for 6 years and still claim the original property is my primary residence and therefore not pay CGT upon selling?

    How would the ATO or relevant authority determine the "valuation" at the time of producing income?
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    yes
    and you would need to provide the valuation figure and provide evidence if audited.
     
  11. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    If sold within the 6 years no valuation would be needed since 100% of the gain will be exempt. Only needed if there will be a taxable portion. You could obtain a valuation later but accessing this now and retaining on file may be easier and cheaper.
     
  12. Declan

    Declan Active Member

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    I have an investment property that has been rented till now and we now want to move into the property. Would we be liable for CGT for the financial year?

    Also I have hit my land tax threshold - if we buy our next IP under a company name does that mean we have a new land tax threshold?
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    CGT is only triggered on the sale

    You won't have a new land tax threshold, but the company is a separate person for land tax and will receive its own threshold. But consider the other consequences for a company holding property.
     
  14. Declan

    Declan Active Member

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    Sorry i meant land tax threshold - will it be nil if I move back into the property now or is it proportionate for the time it was an investment?
     
  15. Mike A

    Mike A Well-Known Member

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    Agreed we have discussed but I don’t believe it is an election. I don’t think you have a choice unless another provision of the act applies.

    But just deciding not to elect for it to be your main residence at all I don’t believe is available.

    I can’t see where a s118-110 gives a choice. Maybe you have seen something I havent
     
  16. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Not that specific. I had a post on this issue yesterday I'm trying to locate. While the MRE is deemed to apply it can also become an election in some other instances which can assist to bypass the trap in s118-192 where the property is now worth less than it cost. Even a property worth "similiar" to contract cost may be affected since on-costs at acquisition are likely excluded. eg duty, BA, legals.

    With the present markets off their highs it opens a issue not seen in modern past. If at all. That is a property becoming a IP (after being a home) may have a value lower that historical cost.

    This opens the potential routes to address and IF possible avoid the trap of 118-192.

    1. Has the home ever been used as a place of business or used at any time to produce even a single night or two of income whether the whole property or just a portion of it ? eg You have listed the home for sale and signed a contract. Rent it out on Airbnb for a weekend to avoid s118-192? Tip : Avoid boarding.
    2. Did you move into the home as soon as practicable ? This may be important and is easily and often ignored. Its another escape.
    3. Another property that can be used by election as the main residence (by election) for any of the same days that the property involved was also owned eg spouse / partner former main residence etc
    4. Any period when the owner/s were non-resident (a more limited issue)

    Avoiding s118-192 also opens potential for 3rd element (private ownership) costs to add to the costbase prior to any apportioning.

    The strategy of seeking to avoid the full main residence exemption is now a strategy to consider where its arguable it has never posed a concern for s118-192. The falling values in mary markets require a rethink on past thinking and assumptions
     
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  17. Ambrosius

    Ambrosius Active Member

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    The primary residence rule is confusing

    If I lived in my property from January 2011 and then moved out and rented my property out from 1 August 2013 until 6 June 2019 for a period of 6 years, claiming tax deductions, and have kept the property vacant since June 2019 and have not bought another property in that entire time.

    1) Do I pay capital gains tax upon selling it?

    2) What if I buy another property in 1 months time, move into it as vacant possession in order to do renovations and then later rent it out as an investment property?

    3) What If the 2nd property in the 2nd scenario above comes with a tenant and I receive say 2 weeks rent and then the tenant leaves and I move into it in order to do renovations and then later rent it out as an investment property?

    My aim is to keep the principal place of residence vacant until property prices recover so that I don't have to share my capital gains with the government. But I still want to buy an investment property that, after I sell my primary place of residence in a few years time, I can then make the investment property the primary place of residence.
     
  18. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    1) Maybe - Maybe not. The correct question is can it be exempt for that whole period ? Possibly.

    2) You could choose to use the 6 year rule for the former home OR the new property while its actually your MAIN residence. There may be a choice of either but probably not both !!

    3) Then that propery would always be subject to pro-rata CGT based upon time. But 3rd elements costs while it is privately used may add to the costbase rior to the % apportionment. Whether you actually establish this place as a MAIN residence may need to be explored.

    Its important to get personal advice as there could be numerous issues that imapct all the above. eg IF you had a spouse / partner in that period their property and choices need advice, if the former home was ever used as a place of business etc....The main residence CGT rules are complex and need to consider all the circumstances.
     
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  19. Ambrosius

    Ambrosius Active Member

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    I have just read another thread about expats being forced to sell , I was not in the country for 2 years during the period when the property was rented out. We have never returned to live in it since. We returned in 2015. Do I now have to sell?

    I was keeping it vacant in order to sell it easier and not have tenant troubles and not have to pay CGT
     
  20. Ambrosius

    Ambrosius Active Member

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    So in scenario 1 why would it not be exempt from cgt? We never exceeded 6 years of it being available as a rental. It was vacant for several months during that period also. Its been vacant since?

    How are normal people supposed to plan their fortunes if they keep changing the rules and the law is so complicated. Many people have a rich diversity of interests and cant spend their time focussed on becoming real estate tax specialists.