Renting out PPR before selling to reduce CGT

Discussion in 'Accounting & Tax' started by Hurri, 31st May, 2021.

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  1. Hurri

    Hurri Well-Known Member

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    This is a very specific scenario which I think would be beneficial but would like some forum guru opinions.

    PPR 1 bought, lived in for several years, rented out and then sold. CGT exemption was claimed using the 6 year rule.

    PPR 2 has overlap of 5 years with PPR 1 so CGT will need to be apportioned when I sell it, even if I never generate income from it.

    Let's say the purchase price of PPR2 was 1 million and I sell it 13 years later for 2.5 million.
    Capital Gain of 1.5 million with 50% discount would be 750k.
    5 years overlap / 13 years total ownership means I'd have to pay CGT on ~288k
    @ 45% tax bracket = ~130k tax payable

    Alternatively
    Rent out PPR 2 for 12+ months before selling it
    The cost base for CGT becomes the valuation when it first generates an income
    Assuming CG/year ~7%
    2.5 million -> 2.675
    Capital Gain = 175k x 50% = 87.5k
    @ 45% tax bracket = ~40k payable

    Sorry I couldn't make the above more concise but this makes a ~90k difference when selling.
     
  2. Trainee

    Trainee Well-Known Member

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    You have a tax lawyer who agrees to this interpretation?
     
  3. Terry_w

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

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    It doesn't work like that
     
  4. Hurri

    Hurri Well-Known Member

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    No need for the sarcasm friend, we're all just here to learn.

    I'm going off previous posts and examples from the ATO website.
     

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  5. Trainee

    Trainee Well-Known Member

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    If someone was asking a lawyer about this, they might ask,
    If the property was not my main residence between years 0 to 5, can I still apply the cost base reset rule?
     
  6. Paul@PAS

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

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    Calculation of a tax liability is not legal work. It is a tax agent service. However interpretation of how s118.192 operates is legal advice and is a fairly evident issue.

    The pro-rata CGT liability would apply to the 5 years + 6 months out of 13 years. The costbase is not reset.
    s118.192 is limited to the case where a taxpayer home is 100% exempt prior to the date it first produces income. It cant be used in this example unless you are still within the amendmnet period to amend the original CGT exemption on the first main residence.

    You also have ignored third element costs which increase the cost base substantially during the period you occur the property. This will increase the costbase subject to the pro-rata calc.
     
    craigc and Hurri like this.
  7. Hurri

    Hurri Well-Known Member

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    Thank you for the amazing answer. That definitely points me in another (more correct) direction.
     
  8. Trainee

    Trainee Well-Known Member

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    What other directions might be explored?
    Testamentary trusts?
    Switch ppor before death?
     

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