Question on Partial PPOR CGT exemption

We've owned our home (which we've lived in) in the North Coast for ~2 years which has experienced great capital growth.

We're are looking to purchase another home to live in and move out of this home.

We will eventually sell our existing home and are trying to decide if we sell now or in another few years. The CGT we pay will play a big part in our decision.

If we keep our North Coast home for another few years (and assuming we use the NEW home as our PPOR and NOT the old home) how is the CGT exemption applied?

Is it simply pro-rata? For example, we've had it 2 years and keep it a total of 4 years with a total Capital Gains of $500k. Do we get the full PPOR discount for half of the time, and then the 12-month CGT discount for the remaining half, meaning we there is a capital gain tax event of $125k?

Or, can we get a valuation when it is no longer our PPOR, and then pay the capital gains (with 12-month discount) on the difference between that valuation and the sale?

As an example, take the example of $500k capital growth, and let's assume that $400k of that was experienced during the 2 years of PPOR and $100k was experienced in the 2 years afterwards when we are renting out the property. Does that mean there is a capital tax event of only $50k (because we get 12-month discount on the $100k)?

I know there is the 6 year rule, but let's assume I want to use our new home as the PPOR.

Thanks

 

Not quite

If you rent out your old home then the cost base is reset to its market value on that date. So you would ignore the years you previously lived in it in your CGT calculation.

Using your figures provided: if you sell 2 years after renting it out and its value has increased by $100k (and you choose not to use the 6 year absence rule) then this $100k would be your capital gain (ignoring other CB costs).

After applying the 12 month discount the net gain would be $50k. Assuming the house is jointly owned you and your partner would have each report a CG of $25k in your tax returns.

 

You may be able to use the CGT absence exemptions. There are two
- 6months ovrlap allowing the former home to be sold while also getting exemption on the new AND/OR
- UP TO 6 years exempt using the absence rule. However for the period after 6mths you must choose either the old house or the new as exempt. Not both

s118.192 imposes a requirement to consider and retain valuation as the costbase resets of the date the former home first produces income. If you elect for the new home to be exempt then tha gain may easy to calculate as the sale prices less costs to sell less that value. If over 12mths since the s118.192 date then half is taxable. Each owner share of course.

 

Did you move into the property immediately when you bought it?

 

I have covered all these in my tax tips

some of which are:
Tax Tip 318: Can you Claim 3rd Element CGT Cost Base Expenses while living there? http://bit.ly/3qX9Nsm

Tax Tip 190: CGT Strategy Wait 5.5 Years Before Selling the Old Main Residence https://www.propertychat.com.au/community/threads/tax-tip-190-cgt-strategy-wait-5-5-years-before-selling-the-old-main-residence.36905/

 

Yes

That's great!!! Whilst I don't have a crystal ball I'd be very suprised if Ballina sees the same capital growth over the next couple of years as it has over the past 2 years.

If it was pro-rata then we would almost certainly sell asap (maybe use the 6 month overlap rule), but given we reset the cost base then we may keep it.

Thanks, we had a CBA do 'valuation' when getting approval for loan for our new property. But it was massively underestimated based on recent sales in my street (there have been 2 sales in the last 6 months on my street).

What's the best way to get a valuation that reflects the true value and not what a bank thinks. Is a Real Estatate Appraisal sufficient?

 

OK, so let's say I go down the path of using the 6 year rule for existing property and pay no CGT.

Let's say I live in the new property for 12 years.

I only pay CGT on the first 6 years because the next 6 years it's my PPOR.

The increase in CGT between year 6 and year 12 is fully excempt.

Now let's assuming that there has been an increase in value of $300k from purchase to the 6 year mark (based on a valuation).

Let's assume we also spent $100k on rennovations, rates over the years, that means CGT is $200k then after 50% discount my wife and I each add $50k ($100k in total) to our taxable income.

Some of this was spent whilst not the PPOR and some during the time of PPOR but all of this will increase the cost base. Is that right?

 

No. Many issues here. This requires personal tax advice not posts from unqualfied people.

 

No, there is no cost base reset you would need to work out the cost base and apportion it based on time

 

Thanks everyone for the response.

Ah, ok thanks. Someone posted above that the cost base is reset to its market value on the date we start renting it out (when it no longer becomes our PPOR).

So I'm a bit confused and will get some advice I think. Thanks

 

That is correct, but it doesn't apply to the one you move into.

Tax Tip 321: CGT Differences between Renting a Main Residence and Moving into an IP Tax Tip 321: CGT Differences between Renting a Main Residence and Moving into an IP

 

tbh should this be a consideration when buying? More of a consideration when selling.

 

We bought and lived in a house for approx 15 mths, we have then rented it out for 12 years. How long would be have to live in it again to claim it as our ppr?

 

It would depend upon how much you want to reduce the CGT, so far the reduction applicable could be 15 or 87 months (6 years absence) however the trade-off is the loss of the PPOR concession on your current residence.

 

1 day potentially, but it will depend on the circumstances and are you asking in relation to income tax, land tax or social security or something else?

 

And if we shifted back in for say three months, sold it and claimed ppr on our joint income taxes, could we then go back and live in our existing house and not sell that for say ten years and claim that as ppr? (not idle question, actually thinking)

 

You could but it wouldn't be fully exempt for CGT

 

if you were away for 10 years then you can only use the 6 year rule for the first 6 and then going to have proportionate CGT.

6 Year Rule. How Might it Help me Pay no Capital Gains Tax ?

 

CGT isnt based on the issues evident when it is sold. The CGT formula considers the whole ownership period and each day of use. eg As Mike says. UP to 6 years exempt. Other days you live there as exempt. Also consider where you live when absent.
Tax advice may help you since there may be many costs you arent considering that can reduce the tax issues.