Tax Tip 119: How to Reduce CGT on Investment Property (Part I)

Thanks very much Terry & Paul for the prompt reply posts.

I have found the following information on the ATO website which may be helpful to other readers:
Deceased acquired the dwelling on or after 20 September 1985

You disregard any capital gain or loss you make when a CGT event happens to the dwelling (such as selling it) if either of the following applies:

• the dwelling passed to you on or before 20 August 1996, and:
  • Condition 2 (main residence while you own it) above is met, and
  • the deceased used the dwelling as their main residence from the date they acquired it until their death and did not use it to produce income

• the dwelling passed to you after 20 August 1996, and:
  • Condition 1 (disposal within two years) or Condition 2 (main residence while you own it) above is met, and
  • just before the deceased died it was their main residence and was not being used to produce income.

A dwelling passes to you when you became its owner or, if you became absolutely entitled to it before or without becoming its owner, at that time. (The trustee or executor should be able to tell you whether or not you became absolutely entitled to it and, if so, when).

Example: Full exemption

Rodrigo was the sole occupant of a flat he bought in April 1990. He did not live in or own another dwelling.

Rodrigo died in January 2015 and left the flat to his son, Petro. Petro rented out the flat and then disposed of it 15 months after his father died.

Petro is entitled to a full exemption from CGT as he acquired the flat after 20 August 1996 and disposed of it within two years of his father's death

 

The two year CGT rule is often overlooked or even ignored. In many cases you may be surprised how many people think that an estate must be sold up and converted to cash as promptly as possible.

 

Is there a further potential strategy, which is to progressively sell the IP into a family trust following retirement. 25% share sold this year, 25% share next year, etc, until completely sold. So, by breaking up sale in smaller chunks, you keep realised capital gain low (each year) for vendor and hence take advantage of lower marginal tax rates.

 

Yes a good one potentially. The trouble is need to to reapply for loans 4 times and the mortgage discharge and registration fees.

Stamp duty would be cheaper too possibly but could be aggregated as one transfer.

 

Hoping for advice from @Terryw and/or anyone else who may be able to help with a CGT query?

Soon to sign a contract which will trigger a CGT debt of around 30K yay!

My Gross employment income is around $111K, I salary sacrifice around 20K to my mortgage and don't pay any additional to super. I have 3 other investment properties which are all neutrally geared.

My PPOR has a large mortgage which is offset by my savings in a linked account. I had planned to top up my offset account with the profit from the sale, which together with my savings would effectively reduce my mortgage to about 100K but am instead considering renting out my PPOR for a while. If I clear out the offset account, the interest on the remaining mortgage would then be claimable and the PPOR negatively geared.

My plan is to place the proceeds from the sale + the bulk of my savings into an offset account against my daughter's mortgage instead. She is studying, struggling to meet financial commitments and I would like to help her over that hump. I know that there are all sorts of legal, emotional, and ethical issues that could arise in this situation, but I have no such concerns. Just hoping for information relating to the financial implications of this plan.

I have read a little about reducing CGT by moving CG into super and that paying interest on loans in advance can help to reduce CGT? Not sure why in advance? Also I have never claimed depreciation on the property so not sure how that will go. If I remember correctly, I read recently that if you didn't have a building valuation from purchase, and can't easily get one and haven't ever claimed depreciation, the tax man may disregard the effect of depreciation? Something to do with the fact that it would be unfair as you can only make a retrospective depreciation claim for the prior 4 years?

What I would like to know is:

Would reducing my taxable income for this financial year by negatively gearing this property, help to reduce my CGT debt?

And

Has anyone had experience with CGT when you haven't had a valuation or depreciation schedule and have never claimed depreciation?

Any advice/ direction/ suggestions would be greatly appreciated and a recommendation for a good property tax advisor in Adelaide would be most welcome too? I have had the same accountant for the past 20 years, but as I've learned more myself, I've realised that property tax is not really her forte.

Thanks in advance.

JASA

 

So provided the owner moved into their IP before death any previous tax deductions on depreciation claimed are ignored if sold and settled by beneficiary within two years?

 

Yes possibly reduce CGT as the capital gain is added to your taxable income of the year. But any savings could be minimal.

I suggest you pay for some tax advice.

 

Pre or post

 

Well, if the property was their main residence - merely moving in may not cut it.

 

It does not talk about previous just that as it was the main residence and not producing income.

 

This would be great if the cost base becomes the value at the time of passing. Somehow I don’t think this is correct especially if it was previously IP. I think property would have to meet post 1985 purchase also.

 

What about if the property was bought within a trust with a corporate trustee? This should allow for a change of director only and no need to have the time pressure to sell within 2 years. But how does CGT being looked at when the asset is being sold from the Trust?

 

Have a read of s 118-195 itaa97 and let me know what you think
INCOME TAX ASSESSMENT ACT 1997 - SECT 118.195 Dwelling acquired from a deceased estate

 

Cost base is not effected via a death of a director of the trustee or a beneficiary with property held on trust. This is not as good as holding personally as you don't have the benefits of moving into a rental before death and there is no ability to get the trust property into a testamentary discretionary trust which has great tax advantages over a trust set up during a lifetime.

 

@Terry_w how is receiving First Home Owner Grant affect calculation of CGT?

Is it ignored or reduce cost base?

Assuming IP was first home, say $17k FHOG received, it later became an IP and was subsequently sold.

 

It would be ignored basically.

 

Part 2 is finally up
https://www.propertychat.com.au/community/threads/tax-tip-209-how-to-save-cgt-on-investment-property-part-ii-planning-ahead.39394

 

bump; how mad is option 6! love it

 

6. Die in your investment property
As you approach death move into your investment property with the biggest gain and rent out the main residence.
Usually, it is difficult to get the timing right on this one!

see

Tax Tip 231: Inheriting a former investment property and CGT Tax Tip 231: Inheriting a former investment property and CGT

and have another one coming soon