Selling an investment property: CGT?

Hi all,

We are thinking of selling our investment property which used to be our PPOR for 2 years before we moved out. Here is the timeline, I’m using ALL_CAPS labels in place of actual dollar values.

• 12/2016: Bought the property for the $PURCHASE_PRICE and paid other $BUYING_EXPENSES (e.g: stamp duty, bank, inspection and conveyancing fees)
• 12/2016 – 06/2017: Spent a decent amount on $RENOVATIONS (upgrading the kitchen, replacing the flooring, painting and landscaping)
• 12/2018: Refinanced the property at 80% of the $BANK_VALUE and bought another house as a PPOR. I think the $BANK_VALUE came in higher than the $MARKET_VALUE at the time because the market took a plunge right around that time (during VIC state election and few months before the federal election)
• 01/2019: Moved into the new house and rented the first one
• 01/2019 – 01/2020: Spent $RUNNING_AND_MANAGEMENT_COSTS (e.g: mortgage interest, council rates, insurance, water service charges etc..) and obviously earned a $RENTAL_INCOME

We haven’t lodged the 2018/19 tax return yet, which means we haven’t claimed any expenses on the investment property yet. We will consult our tax agent for the proper advice, but I would like to run it by this community first to see what to expect and what is the best way to proceed (also to know what questions to ask our tax agent).

I have read a bit about the 6 year CGT rule, and the 6 month transition period but not sure if those are applicable to us given it has been more than 6 months since we moved out and we own two properties.

I can think of a few different ways of calculating CGT but

here is the best outcome:
1. $SELLING_PRICE - $SELLING_COSTS - $RENOVATIONS - $BUYING_EXPENSES - $BANK_VALUE (capital loss)

What I think is reasonable and hoping for
2. $SELLING_PRICE - $SELLING_COSTS - $MARKET_VALUE (this is closer to the tipping point, so no loss or gain)​

The worst case:
3. $SELLING_PRICE - $SELLING_COSTS - $PURCHASE_PRICE (capital gain)​

Which is the correct method ?

EDIT : I removed $RENTAL_INCOME and $RUNNING_AND_MANAGEMENT_COSTS because I realised that don't come into play for just the CGT calculations. I was thinking of overall taxes, not just CGT. Sorry for the confusion.

 

none are correct.

 

Care to elaborate? Or at least which is closer to the real value ?
I’m not after the exact formula, but nice to know at least a rough estimate.

Edited the OP.

 

Its too hard to understand. Best to seek specific advice. There may be no CGT by using the 6 year rule, potentially, but this has implications

 

I have booked an appointment with my Tax agent, but in two weeks. Thought I’ll do some legwork in the meantime, hence the post.
But good to hear that there is at least a chance to avoid CGT. Keeping the fingers crossed.

 

The 6 month transition does not apply. It simply allows for an overlap where someone purchases their new PPOR before selling their current PPOR.

 

Yes, that’s what I thought too.

I’m happy to pay CGT if the calculations are based on the value of the property at the time we moved out, but it would be pretty unfair if we are asked to pay based on the original purchase price. Because the house appreciated quite a bit during the 2 years we lived in it; due to a couple of developments in the area and the boom at the time, not to mention the money we spent on renovating it. But unfortunately the prices have stagnated (perhaps even gone down slightly) since we moved out.

 

If you choose to leave that property as your PPOR you will then pay CGT when you sell the new property.
How are you working how much interest to claim this year? As the increased in the loan was to buy the new PPOR.

 

You have a variety of mechanisms potentially available to reduce CGT. Others will affect the calcs and increase it.

1. Claim MRE on the former home and use the absence rule BUT not claim exemption on the new home for any same days. In theory CGT could even be $0.
2. Claim MRE on the former home and use the rules in s118-192 to reset the costbase and its taxable thereafter but selling costs etc will impact. If the value works it may be a sound strategy.

Under 1 you may have no CGT but the CGT on property 2 will be impacted when it sells since both can never be exempt. You also want to explore if the costbase reset in s118-192 can be avoided. If so it will change the calculations if third element costs are permitted or available. This may even benefit property two !!! So the future CGT issue isnt what you think. That could be $0 too at this point.

 

Both your & Paul example 2 appear closest. You will have to confirm you are eligible for MRE & also add back depreciation claimed etc whilst IP. Support ‘Market value’ with evidence also required. Other comments from Terry & Paul apply as well so check with your tax advisor.

 

Is the second property your "forever home" ?
As the longer you live in the second property the cgt % should diminish, this would mean claiming MRE on the first property.