Tax Tip 39: Improving the Main Residence - Tax Free Money

Improving the Main Residence


The Main Residence of a person is generally free from CGT. This will generally include any improvements to the property. It therefore makes sense to maximise this, especially before selling a Main Residence.


If you spent $20,000 to get an increase in value of $50,000 that would mean $30,000 in tax free money. Normally a person may have to earn $50k or $60k to make an after tax return of $30,000. That is a year’s salary for many persons.


So improving the Main Residence is a great strategy - especially before a sale. But remember not to over capitalise otherwise your improvements may not get you more than the cost of the improvements.

 

But who can determine the $20,000 spent can improve the $50,000 of the property value?

Do the property evaluation before and after $20,000 spent?

 

This is for each owner to determine. Would spending $20k to do $X make the value increase by $Y?

If not then there may be no point in doing the improvements.

No point in doing a valuation unless to satisfy your interest.

 

Can we not use this strategy to pull equity out of PPOR to invest? I have an equity loan against my PPOR. The bank valuation came at 100k less than what I though my PPOR was worth. One of my side fences, is an old rotting timber fence and looks horrible. The neighbour shows no interest in wanting to replace it as he has kids to feed and a low paying job. I get along well with the neighbours, so don't want to push this too much. Should I put a new fence at my own expense? So the bank values my PPOR more and I get a few extra grands to invest with?

 

Not sure how your are tying this in with my post above but yes sometimes paying for a whole fence yourself is worth it as it will add so much more in value. I have done this myself.

 

Is CGT only applicable for the period that the property is only an IP? Eg, we have bought a house, but it is tenanted. We intend to move in at some point. If we later sell it, is CGT only applicable up to the point we move in (ie get a valuation at that point), or on the final sale value of the house?

Btw, awesome work Terry - very helpful!

Inertia

 

In this situation it would be worked out on a time % basis. e.g. 1 out of 5 years rented = 20% subject to CGT.

 

Hi Terry,

And would the 20% CGT be on the final sale value of the property or on the evaluation value of the house when it was last rented (say few years ago)?

Thanks....

 

Every CGT calculation is different and to avoid overpaying tax its always worth checking with your tax adviser. CGT errors are common. Over and under. IMO both equally as bad.

 

On the final sale price.

 

Yes but no @Terry_w

You forget to mention that all of the work done to the ppor is from after tax $ unlike the IP where it becomes deductible (in whole or in part ).

 

Yes, great point Scott.

Would depend on the sort of work done though.

 

Thanks Terry, you could also consider making the property an IP while you undertake the improvements (though it will be capitalised), take advantage of the PPOR 6 year rule and get the best of both worlds

 

So Terry if your PPOR was initially an IP and you have done improvements to it whilst it's your PPOR how is CGT calculated?

For example property purchased for $800K, tenanted immediately after purchase for 12 months, then became PPOR and let's say $300K worth of renovations are done over the next 4 years.
Property is sold in year 5 for $1.7m.

Is CGT calculated on $1.7m - $300k - $800k = $600k/5? Therefore CGT is based on $120k less 50% as property held for more than a year?

Or is it some other way?

 

The renovations would be added to the cost base

Remember you will also need to make an adjustment for any divison 43 capital allowances claimed

 

Or just hold shares in Wesfarmers and watch all the DIY zealots spending cash in the hardware stores every weekend. Try getting a parking spot there on Sundays!

Not tax free, but no risk that you are over-capitalising ... and you still get your weekends free.

Discount capital gain and fully franked dividends. But I don't mind paying tax on profits that don't require me to do any work.

And you don't have to waste your time watching mind numbing home improvement programmes (infomercials) on TV during the week for home improvement ideas.

 

Dont buy Woolworths shares to emulate the success of Wesfarmers / Bunning though.

Like food, Woolworths had no idea about hardware and had US experts guide them into burning billions. I reckon Bunnings sausage sizzle outsold Masters last year.

 

The cost base may also include other costs eg stamp duty, legals, selling costs and other non-deductible capital expenditure. (Building & pest is a example). Perhaps exit fees on a fixed rate loan ?

 

excellent thread Terry! alot of us tend to neglect improving the ppor!

 

Its the only tax free asset you will get (generally)