CGT and negative gearing question

Hi Dave,
I have a few concerns with that one.

“If you really want to avoid CGT and keep your negative gearing ….”

1. I don’t see where these two are related in any way – but, to be fair, perhaps they were answering a question from someone else who had referred to both CGT and -ve gearing. Not a big deal…..

“Buy your house and then live in it for 12 months. Buy another house and move into it and rent the first one. You have 6 years before the first house will attract capital gains tax. Sell it before then.”

2. Seems correct as far as the wording goes, except they have forgotten one major thing – the one you buy and move into CAN’T then be your PPOR if you are keeping the first one as “PPOR exempt” while you rent it. We cannot own TWO PPOR’s at the one time (except for a short period when changing from one to another). If you were to do it as mentioned in quotes, the SECOND house would NOT be CGT exempt (i.e. NOT your PPOR).

“You will however have all your eggs in one basket if you keep tying new properties to old ones with the bank….”

Eeekkk !! Sounds like they are cross-collateralising their houses. It IS a valid way to go, BUT it can cause major problems down the track – when trying to sell a property, or when wanting to switch lenders. We warn AGAINST cross-coll here.

Actually, on a re-read, just like in 1. perhaps they are responding to an earlier comment, and this part of their reply was a warning (not a suggestion) to the one asking a question. On that basis, I am less concerned about that last bit now.

But 2. remains as a major concern….

Benny

Dave, simply you can’t double dip. If you PPOR is house a and you live in and also own house b, the time frame you selected for house a being you PPOR will be used to calculate the CG in house B when you sell it. In saying that if you own house B for 30 years and sold house A 24 years ago I highly doubt there are any tools sophisticated enough to calculate what capital gains tax you owe not to mention the tax man isn’t that well coordinated. Hope this helps.

6 month rule only applies when buying replacement home before selling old home.

Also keep in mind no main residence cgt exemption when held on revenue account.

Ideally you would live in every property you own initially to establish them as the main residence. Then you have a choice of which to eventually choose to be CGT. But you only have to make this choice on the sale of the first one. You would ideally reconisder each property after 5.5years since you moved out.

You only choose at the point of sale.

Say you did buy A and B say 12 months apart. You lived in each of them for 12 months and then moved out and rented. 5.5 years after moving out of A you move back in and 5.5 years after moving out of B you move in for 12 months.

Then after about 12 years of ownership of property A you decide to sell it.

At this point either A or B could be cgt exempt completely but not both. So now you need to do some number crunching and work out is it better to avoid cgt completely now and potentially pay it on the sale of B later or is it perhaps better to not claim A as the main residence and keep the exemption going for B.

It could be worth paying a little bit on A to avoid a big bit on B later.