Have greatly appreciated the information found in these forums – but have been unable to find anything regarding a specific query.
My fiance and I have recently bought a property which I'll call property 1 for about $450k which is land value – the settlement is 2 months from now.
Currently it is tenanted for 2 months after it settles.
We already have another property which is in my name that is our current PPOR which I'll call property 2 – it's worth about $330k and owe about $200k on it.
Our intention is to eventually demolish property 1 – and build our family home on it which will become our PPOR.
At the same time, for cash flow purposes we would sell property 2, our current PPOR.
Our original plan was to keep renting out property 1, and using the rent and negative gearing capacity to help pay for the eventual construction of a new place on the site of property 1. While it is being built we intended to keep living in property 2.
Our concern is that in the process of demolishing property 1 and building a new PPOR we will dramatically increase the value of property 1 perhaps to $800k immediately. If we go on to sell it we fear that will will have to pay CGT on the full growth in value should we sell property 1 in the future.
Is this assessment correct – that we pay CGT on the improved property value after demolishing the house on property 1?
For CGT purposes are we better off moving to property 1 and using it as our PPOR and renting out property 2 and then moving back to property 2 while we're building property 1?
Are we still liable for CGT for the 2 months that the tenants are living in property 1 after settlement anyway?
Am very confused and would appreciate any advice.
Best regards,
J
jhjw wrote:for CGT purposes are we better off moving to property 1 and using it as our PPOR and renting out property 2 and then moving back to property 2 while we're building property 1?Are we still liable for CGT for the 2 months that the tenants are living in property 1 after settlement anyway?
Am very confused and would appreciate any advice.
Best regards,
J
In short yes and yes.. sorry I dont have time for a more complete answer right now, look up “home first used to produce income rule” on the ato website. not to be dramatic… but if there’s tenants in there in settlement date, then that fact alone will cost you more in CGT than the tenants will pay in rent for a year ( + your negative gearing advantage)..
will give you more info tomorrow!!
When you demolish property one and build a new property there is a cost involved in building the new property.
This construction cost is added to your cost base and reduces the impact of CGT however you will have to deal with GST on 1/11th of the eventual sales price if you sell it so check with your accountant on GST liabilty.You may be liable for CGT for the 2 months that the tenants are living in property one after settlement.
This is due to not moving into the house in an appropriate time after settlement.
However you can proportion the capital gain as you are only liable for the amount of gain during the time it was rented out.
You could get a valuation when you move into the property to work out the deemed sale price (deemed sales price when you changed to PPOR exemption) and also the capital gain for the short period.
Search the ATO web site for main residence exemption fro examples of time proportion.
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