Tax Tip 120: CGT and moving into an Investment Property

CGT and moving into an Investment Property

When moving into a property that has previously been rented out the main residence CGT is not available in full if the property is later sold. This is because the property was income producing for part of the ownership period.


How to work out the portion liable for CGT?

The value of the property when you move in is irrelevant because the Capital Gain or the Capital Loss is worked out based on a formula found under s118-185 ITAA97:

CG or CL amount x (non-main residence days / days in ownership period)


Example
Hiu Dong purchased 123 Smith St for $200,000 in 2000. He rented it out for 5 years and moved into it in 2005 when it was worth $600,000. He later sold it for $600,000 in 2010 after owning it for 10 years.

Hiu think he won’t have any CGT to pay because there was no growth after he moved in. Hiu is wrong.

The gain in the value is $600,000 - $200,000 = $400,000

Using the formula:

$400,000 x 5/10 = $200,000

(other costs would be used to reduce the CGT payable too, see Tax Tip 76: Calculating the Cost Base for CGT purposes.)

So $200,000 will be the CG that is taxable. Using the 50% CGT discount this becomes $100,000.

This $100,000 will be added to his other income.

s118-185 ITAA97 INCOME TAX ASSESSMENT ACT 1997 - SECT 118.185 Partial exemption where dwelling was your main residence during part only of ownership period

 

Hi Terry,
Suppose I lived in my PPOR for 5 yrs ( on P&I loan) and move into a previously rented IP1 (on IO loan), renting my PPOR.
After the move,
a) can I keep both orig. PPOR and IP1 on IO loan?
b) If I continue treating orig. PPOR as current PPOR ( 6 yr rule), does that mean I cant claim the interest on it for tax deductions even though I am showing the rent as income?
c) What about the interest on IP1? Can I still claim that interest as its not my PPOR, though I am not getting any rental income?

Will be in this situation in couple of years and just planning if it make sense to move into an IP or renting instead. Any tips or things to consider?

 

a) loans won't change unless you change them
b) no
c) no

 

Thanks @Terry_w , if the owner moved into the property first as a residence long enough to establish it as a residence (e.g. 4 months or so), and then rented it out for the 5 years, moved back in and sold it 5 years later, would the calculation be the same or would the "6 year rule" apply? In this case, would the "6 year rule" eliminate the CGT, or is there a different calculation?

If the property was never sold and left to kids in will, would that avoid CGT?

Thanks,
D3

 

It could potentially be CGT free in that case, whether sold or left in the will

 

Thanks @Terry_w , based on your previous posts, I thought so. Just wanted to confirm. Your contribution and knowledge are incredible BTW.

 

isnt quite a statement that indicates a conclusive answer. There are several issues which could impact this. Terry's posts doest actually confirm anything. So take care with your interpretation of his guarded reply. ONLY if a property was the main residence (actual or a eligible absence) at time of death could the property pass CGT free to beneficiaries. In all other cases it will pass with YOUR potential CGT liability intact.

? Was it the deceased persons home at the time of death ? If not that could truly change things.
? Was the person absent for more than 6 years at time of death ?
? Tax`residency at death ?
? Do they have a spouse and do they own other property ?
? Is title as joint tenancy and a spouse survives and so the property passes to them regardless of the will.
and many more.....

 

Thanks @Paul@PFI , got it, not taking it as gospel

 

Hi Terry, we bought a house in November 2019(Property A) and lived in our as our home, but discovered it doesn't really suit us. We just bought a second property in September 2021(property B) which we have just moved into as our ppr but plan on renting out for 5-10 years. It is intended as an investment We are now looking to sell the first home (property A) and buy again into something that will suit us as a home long term(property C).

How long do we need to live in property B before we can start renting it out and move into property C, in order to minimise CGT when we eventually sell property B?
If property C is rented out before we move in, either because we need to stay a certain time in property B for CGT reasons or because it is leased when we buy it, does this affect CGT when we eventually sell property C? Thanks so much, really need to get this right

 

Also wanted to consider... Would it be advantageous for us to instead rent out property A for a year and then sell it to buy property C? Whatever works best tax wise thanks again

 

yes, it can't be exempt

it might be, depending on the circumstances.

Sounds like you should get some tax advice

 

Thanks Terry, still looking for a good one. Have had several contradictory opinions on this issue. Thanks for you time

 

Hi Terry, say you buy a PPOR but there are tenants in place already with 3-4 months left on the lease. You give notice straight away after settlement that once the lease is expired they will have to move out. They continue to pay rent for this period of time. You then move in after the 3-4 months is up. The property then becomes your main residence for let’s say 5-10 years, would there be any CGT to pay when you sell after this period of 5-10 years?

 

Yes, it could not be fully exempt, but the CGT may be nil or very small

 

Thanks Terry.

 

We bought a property on the Sunshine Coast in 2019, lived in it for 6 months and found I was spending 10 out of 14 days in Sydney for work so moved back to Sydney and rented it out.

Plan was to move back in before 6 years was up, reno and sell with no CGT.

Since then, we've changed our retirement location to Nelson Bay/The Entrance. If we move into retirement property before 6 years is up, I believe the exemption ends when we settle/move into 2nd property and CGT will start accruing on 1st property.

Generally, is it better to sell before it turns into an investment property with tax dept as it was never meant to be that. We could still reno and sell it and rent out 2nd property in 5 years for a year. Then there will be CGT accrued for the 4 years it was an investment property, yes? How would that be calculates - would bank get a valuation at the time, etc?

 

your understanding is incorrect. There is another tax tip on this which I have written

 

Valuations are irrelevant in most situations. The ONLY time valuation applies is a property that has always been a main residence with a 100% exemption. s118.192 mposes a costbase reset on the date if first produces income. A valuation at the top of the market value range is then suggested.

Otherwise all CGT calcs are pro-rata based on the formula which started this thread. With a possibility to add NON-DEDUCTIBLE ownership costs and DEDUCT DEPRECIATION & CAPITAL ALLOWANCES CLAIMED to the CGT costbase before the apportioning occurs. And add new assets improvemnets and the like at their cost and reduce the sale proceeds for their inclusion in the sold property. Such a issue for 3rd element ownership costs occurs for the period after s118.192 applies only if that rule is used.

 

Hey @Terry_w , any chance of pointing me to it? You've got hundreds.

 

Look for tax tips on 6 year rule. There’s a lot less of those.