Tax Tip 240: Buying a Main Residence which is initially tenanted and CGT.

Discussion in 'Accounting & Tax' started by Terry_w, 7th Sep, 2019.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Imagine you buy a property with the intention of moving in, but there is a tenant whose lease doesn’t expire for another 6 months so you keep renting and wait for them to move out so you can move in.

    What are the CGT consequences of this?

    Well, that property will always be subject to CGT as you did not move in straight after purchase.

    But all is not lost because CGT will be minimal to almost nil where you remain living in the property for a number of years. Furthermore 3rd element cost base expenses can be used to reduce CGT even further.

    Example
    Homer buys 123 Smith Street, but the contract indicates it is not vacant possession. It will come with a tenant with 6 months left on the lease.


    Contracts signed on 1 July 2019, but Homer doesn’t move in until 1 Jan 2020, with a hangover.


    Let’s say Homer sells that property in 2030, signing contracts on 1 July.

    Will he pay CGT?

    He might, but it may be a very small amount.

    The first thing to consider is to work out the time period it was rented as a percentage of the total ownership period.

    6 months/132 months = 4.5%.

    So, at most the capital gain would be 4.5% x 50% x the gain or 2.27% of the gains on the property. Bugger all – note the 50% is the 50% CGT discount applied for holding the property for more than 12 months.

    But before this is done, the cost base has to be worked out. The capital gains are the sale proceeds less the cost base.

    The cost base expenses include buying and selling costs and, importantly, the interest, rates, repairs and costs while living in the property can be taken into account here and they will further reduce any CGT, potentially bring it down to nil as over 11 years these costs would add up.
     
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  2. Mike A

    Mike A Well-Known Member

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    homer might be able to use the six-month overlap rule to reduce it to nil
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    But only if he sold another property
     
  4. Phar Lap

    Phar Lap Well-Known Member

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    I presume we are talking about in Australia.....cause I dont know anyone in Oz named Homer.:D
     
  5. datto

    datto Well-Known Member

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    Or Bart. Well not many.
     
  6. Mike A

    Mike A Well-Known Member

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    Plenty of marges in the druitt however
     
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  7. Invest_noob

    Invest_noob Well-Known Member

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    What if homer signs the contract on 1 July 2019 but negotiates a settlement date of 1 Jan 2020 and moves in on that date, would he still be liable for CGT for that period?
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    No because he would have moved in as soon as practical. s118-135 itaa97
     
  9. Invest_noob

    Invest_noob Well-Known Member

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  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    That is correct. CGT works, generally, on the date of the contract. But a person cannot move in until settlement so s118-135 applies to count from the contract date to the settlement.
     
  11. pc117

    pc117 New Member

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    Hi @Terry_w ,

    Firstly, really appreciate all your input with the tax tips (and Paul's usual follow ups!).

    Can you please post a reference to the legislation for the ability to increase the cost base with costs incurred after you move in and the tenant has left (i.e. for the time it was your main residence)?

    I would have assumed that any costs incurred after you move in would be personal in nature and not taken into account for CGT purposes. As you said, for the example above, adding things like interest and repairs for the years that you were living in it is likely to be very substantial and would likely reduce the CGT to nil, or v close to it.

    Thanks