Warning about renting your PPOR - Rentvest caution

Thinking of moving and renting your PPOR ?

The falls in many markets may mean that a property is lower than its former value or in some cases (recently acquired ?) it may be valued less than its historical costbase. The historical costbase would include the purchase price, legals, duty, BA fee etc.

So why may that be a worry ?

s118-192 of the Income Tax Assessment Act 1997 REQUIRES that a property that has always been solely used as an exempt main residence has its costbase reset to the present market value on the date it first produces income. In stable or rising markets this works very well to simplify CGT rules. However, in falling markets this can expose the owner to more CGT than would apply if the actual historical cost was to apply

Example :

Phil and Sue buy a home for $650K in Melbourne in July 2016. They now seek to move out and rentvest. They will rent elsewhere and also seek a tenant for their home. The market value is $550K according to their agent.

Phil and Sue will have their CGT costbase reset from $685K (the cost incl legals, duty etc) to $550K and be exposed to paying CGT on an additional $135K.

Any way around this ?

Not really as that law is a requirement however it is possible that they could use other CGT laws to reduce or eliminate the taxable gain. Those incapable of using either option may ultimately one day face a higher tax than if the s118-192 rule wasnt used :

• 6 year absence rule. This would allow their former home to remain tax exempt for a period of up to 6 years. They could move back in and later repeat the 6 year process.
• If they used their home before moving out to earn income from a home used as a place of business or to produce income even for a single night (Airbnb !) they may avoid s118-192 issue altogether. They then may be able to inflate the costbase using non-deductible costs of ownership during the ownership period on top.

 

If Phil & Sue moves out of PPOR at peak of market value (say $750k), they could also be sitting on a greater CGT calculations loss using the same principles if the current value has now dropped.
Agree it’s important to consider all the implications & calculations.

 

Opportunity?

Planning to have future capital gains tax liabilities? Need to sell the PPOR? Start renting it out now in a falling market, sell and lock in capital losses to carry forward to future tax years?

Extension of that, for those who plan to sell in 2019 who have been subletting their PPOR cash in hand or using part of the premesis for business and not claiming deductions, might pay to declare in this years tax return to lock price near peak in mid 2018, again more capital losses to carry forward.

I guess my point is if you are planning to sell in a falling market anyway you might as well harvest some nice big capital losses to offset gains in future years.

 

Depends if it will keep falling