Property title owner, build-to-rent, CGT discount

Discussion in 'Accounting & Tax' started by PPAP, 20th Feb, 2020.

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  1. PPAP

    PPAP Member

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    We intend to subdivide our block and build a unit at the back. Mortgage on the current house is on both spouses but only one person is on the property title.


    Q1. Are there any tax benefits or other concessions for having both of us on the title?


    Ideally, we would like to sell the old house and rent out the new unit...we then buy another unit in an area where we want to live (presuming we can service both loans, for our new Principal Place of Residence - PPR and the newly built investment unit we are renting out).


    Q2. Are there any tax concessions when you build a new unit to rent out?


    If we won’t be able to service both loans we would sell the old house and move into the new unit at the back. Live there for 12 months to be entitled for a 50% tax discount on any capital gain we make when selling the new unit...then use the proceeds of both sales to buy a unit in our desired area.


    Q3. Are we entitled for the capital gain discount in both cases...when we initially sell our old house and another PPR, the new unit, 12 months later?

    I thank you in advance for any assistance with this!
     
  2. Terry_w

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

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    1. Gains split potentially lowering tax overall.
    2. Yes depreciation
    3.
    50% discount might be possible if held more than 12 months
     
  3. Terry_w

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

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    But changing to both owners is a dutiable transact and a cgt event unless an exemption applies
     
  4. PPAP

    PPAP Member

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    Thanks Terry_W.

    Ok, are you saying that irrespective that the mortgage is on both of us, if we sell our current house all the proceeds from the sale will be appended only to my partner's income for the year (for she is currently the sole owner on the title)? In other words, we can't split the gains unless we are both on the title?
     
  5. PPAP

    PPAP Member

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    I've just done some research and by the looks of it in both cases the sale will be exempt from CGT as in both cases they would be our main residence at the time of sale.
     
  6. PPAP

    PPAP Member

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    Does anyone have any idea what a unit that costs 200k to build would yield in depreciation, let's say over 5 or 10 years?
     
  7. Terry_w

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

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    Think you mean loan. Loans don't effect cgt at all if you are claiming the interest
     
  8. Terry_w

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

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    Building is the same whether new or second hand, except newer will have a longer life. But it is fixtures and fittings or plant and equipment that can only be depreciated if new.
     
  9. PPAP

    PPAP Member

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    We have a house that is now our main residence...but we had rented it out for some 8 years before we moved back 6 years ago. We have a joint mortgage on this house 50/50...it's just that the property title is only on my partner's name. If we sell this house we would need to pay CGT for the period we rented the house...and I thought any capital gains would be split between us irrespective that I'm not on the title.
     
  10. Archaon

    Archaon Well-Known Member

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    The house that is your PPOR, did you move in when you bought it or rented out for 8years before occupying it?

    If you did live in the house before renting it out then you could access the 6 year main residence exemption if you didn't have another main residence in that time, there for the first 6 years are CGT free, 2 years in the middle, than the final 6 years are CGT free, make sure you get accountant advice in this regard.

    If you sell the old house as your main residence, and then move into your newly built unit/townhouse, that new property will be your new Main Residence and CGT exempt.

    Then, when it comes time to buying the new PPOR, you can gauge your servicing with a competent Broker at that time and see if you will be able to access the funds or need to sell.

    Also, an Interest Only loan is suggested for the new build after completion if you think you will use it as an investment, therefore the total loan amount will be deductible upon moving out and renting.
     
  11. Terry_w

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

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    Nope
     
  12. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Incorrect. And further to terrys clear reply above. Its possible that ONE may be partly exempt. The other wont be at all and could even be a GST and a profit subject to ordinary tax (not CGT). You really should plan projects like this based on tax advice. The ATO are your silent partner and may take a larger share of profit than you think

    Your research is not very good. There is never a test of what the property is used for when it is sold. But there is a test of intention to produce profit. That can sever the CGT asset and treat sales as ordinary income. Every single day of each property life must be considered. This prevents the main residence exemption on two lots by leap frogging as you suggest. And when you knock down then no exemption can even exist as there isnt a dwelling. One of the newly created lots will retrospectively lose all its past exemption as well !!

    Initial info here
     

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    Last edited: 21st Feb, 2020
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  13. BMT Tax Depreciation

    BMT Tax Depreciation Chris Business Member

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    I have some idea. For that kind of build cost, I'd say your first full financial year's deductions are probably going to be between $9,000 (conservatively) and $11,000 in most cases, depending on your fit-out. A rule of thumb for five years cumulatively is to multiply the first year's total by approximately 3.5. Obviously there'll be variations on this but you should at least be in the ballpark. Beyond that, it gets hard to predict without running more figures but you should get the drift.
     
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  14. Terry_w

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

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    Chris is that just the building component or plant and equipment?
     
  15. Mike A

    Mike A Accountant

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    they might be able to use the 4 year construction rule for one of the properties they move into and make their main residence. but they won't be able to apply that to both at the same time.

    there will be some tax to pay.
     
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  16. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Thats what I was thinking.... and you cant use the rule twice on the same land as that would backdate over the other exemption which isnt allowed either.
     
  17. PPAP

    PPAP Member

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    Thanks Archaon!

    Indeed we lived in it for over a year then we rented it out for about 8 years...we then moved back in.6 years ago.

    I presume this is a part of negative gearing?
     
  18. PPAP

    PPAP Member

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    THANKS for the Developer Toolkit Paul!

    I'm still digesting it...but this is the key point for me:

     
  19. Archaon

    Archaon Well-Known Member

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    In a way, it's deductible debt, so it offsets your other sources of income.

    It can also be a guard against not being able to borrow further funds in the future, as a P&I loan gets paid off over a time frame, the total decreases/erodes, where with an IO loan the total remains the same, you could pay money off an IO loan and all that money will be available for redraw for the life of the IO period.

    If you havent already, read through @Terry_w 's tax tips.
     
  20. PPAP

    PPAP Member

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    Thanks for elaborating.

    I've just discovered this forum and Terry's tips indeed seem to be the starting point, at least just to get an overview...as all this is absolutely new to me.