Two PPOR's?

Discussion in 'Accounting & Tax' started by robbo135, 9th Nov, 2019.

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  1. robbo135

    robbo135 Member

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    Hi,

    I am currently living in my current house with my brother which we both co-own. I am looking to purchase another property to move into which will be I guess my PPOR?

    What is the tax status of the current property that I co-own with my brother? I am not earning income nor claiming any deductions on the property (nor will I do so I purchase the new property). The current property we bought together 10 years ago, so we have made some significant capital gains on it.

    Lets say the ATO classify my first property as an IP, if I sold the property in a few years, they wouldn't tax the entire capital gain on it given I lived in it for >10 years?

    Thanks
    Robbo
     
  2. Terry_w

    Terry_w Well-Known Member Business Member

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    You can choose one for any overlapping period.
     
  3. Marg4000

    Marg4000 Well-Known Member

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    If you sell the first property within six months of the date you purchase your new property, both will be CGT free. End of story.

    However, if you retain the first property, it may be considered an IP, and:

    The time you lived there as your PPOR will be free of CGT.

    For the time you retain it as an IP, you have a choice.

    You can claim ONE property as your PPOR - either that IP (limited to 6 years), or your new property.

    So if you claim the IP, your new property will be subject to CGT for that time. Once you sell the IP (or after 6 years), the new PPOR becomes CGT free from that date.

    Or
    Claim your new property as your PPOR from purchase date, and from that date the IP becomes subject to CGT.

    The good news is that you don’t have to make the decision until you actually sell one property, at which time your accountant can run figures to decide which is best for you financially.

    The bad news (if you delay a decision) is that you will have to keep good records on BOTH properties, as expenses affect the cost base.
     
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  4. robbo135

    robbo135 Member

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    Thanks for the detailed explanation, that makes sense.
     
  5. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    The issue with using the 6 year absence rule for the former home is only truly 50% exempt as you own 50%. Assuming both property values remain somewhat linear then the actual new residence would be practical as it would be 100% exempt.

    For the former home you cant claim any tax deductions as you dont receive rental income. If you did receive 50% of market rent you would be able to deduct 50% of the total ownership and operating costs.

    Note that all the costs of ownership from the time you move out will add to your costbase (50% of them) and assist to reduce CGT in the long run. You should do this for both places as your choice may be uncertain.

    One strategy is to start charging rent (50%) to your brother. This would reset your costbase to the present margket value !! It may lock in your past cap gains. You could stop doing this a week later and it still is triggered.
     
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  6. Stoffo

    Stoffo Well-Known Member

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    @robbo135 have you considered selling/transfering your 50% to your brother ?

    Is it his intent to continue to live there, so he gets to use the whole house for free, while you likely still have to pay half the rates and maintenance ?

    Nice work being able to buy and live with a sibling
    Bet you will be loving your own place soon :D
     
  7. robbo135

    robbo135 Member

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    Yeh, but that would incur stamp duty. He also isn't in a position to buy my half out or refinance a new loan in his own right.

    He will be paying 3/4 of the strata and all of the utilities. I'll pay for 1/4 of the strata because I will benefit from any future capital gains and the strata is being used for the upkeep of the building.

    Well we bought together 10 years ago and even with house prices lower back then, it was only through dual incomes was it possible. I do love my brother, but he's untidy and I need my own space :p
     
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  8. robbo135

    robbo135 Member

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    The former home has significant capital gains on it (bought 10 years ago). So I think I would designate that as my PPOR? I doubt the new property is going to achieve the level of capital gains my former house has (even at my 50% share).
     
  9. Trainee

    Trainee Well-Known Member

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    No rent. You still pay some of the costs. Is there a loan? Nothing is deductible.
     
  10. Stoffo

    Stoffo Well-Known Member

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    Just trying to think outside the box here.... (not advice as I have no experience here)
    @Terry_w @[email protected]
    Could Robbo possibly dispose of the shared property to his brother, much in the same way a couple can transfer without incurring state fee's? (Like a seperation/settlement with no actual "sale" as such)

    If this was possible, then Robbo could draft a private loan to his brother with favorable terms of repayment.

    This may cripple Robbo's borrowing power in the short term, but he would be free of cgt complications and the outgoings of property one, while his brother then benefits from future capital gains ? (Provided he does the right thing)
     
  11. Terry_w

    Terry_w Well-Known Member Business Member

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    No duty or CGT exemptions to transfer to siblings
     
  12. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    You didnt read my post. I will spell it out for the slow....You could charge him rent for a week (or even a few days or even one night) and clearly keep evidence of this, charge him 50% of what it should be. The costbase for your portion will reset to the s118-192 rule and its present market value become its new costbase (do this just aftre you move out to new property) . Then the new home can be exempt. This locks in the accrued CGT gains.

    My last free advice for today.
     
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  13. Trainee

    Trainee Well-Known Member

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    So the used for income purposes idea when converting ppor and ip does not require market rent?
     
  14. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    s118-192 doesnt mention it. It says "first used to produce income" for a property that up to that has always been your main residence (for your ownership interest).. Tick.. Income can be under market or above who cares what the basis was. I would argue a long term lease v a one night are very different markets. However I would always recommend a market rate be used which would be a % of the ownership interest x market rate. Look up Airbnb for a one bed x 1 night in local area. Print to PDF and keep that too.

    The tax impacts would be all but nil. Deduct 1/365th of ownership costs. Even if you pay a tiny tax on the one night it locks in the gain. Move on. No hassles.

    Terry - This strategy may be an issue your tax tips dont specifically mention.
    Could Part IVA apply? No. s118-192 is a obligation on an affected taxpayer whether it produces a benefit or not. ie is the market value higher or less than cost ? The "tax benefit" is a right that occurs by law not by choice. The dominant purpose is a legal obligation. A strategy for those who have a partial ownership interest with a sibling, friend etc to consider when them move to a new main residence and utilise at the time they move out to the new property to avoid a loss of the accrued gain tax free.
     
    Last edited: 12th Nov, 2019
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