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Hello all,
We have been living in our 1st house for nearly 2 years and have just bought our 2nd house to be our new PPOR. We are currently trying to sell the 1st house and since it hasn’t sold yet we are trying to decide whether to keep it and rent it out instead. (Value has increased about $110000).One of the queries I have about doing this is with CGT. If we do rent it out, and then sell in say 18 months from now, is the capital gain calculated on:
(sell price – purchase price when we bought it)
or is it
(sell price – valuation before renting out)
??Any help is appreciated.
J.
I believe it’s the latter, sell price – valuation before renting out, as long as you sell it within 6 years of when it becomes an IP. After 6 years the calculation is based on sale – purchase. At least that’s how I read it. Others here might be more sure.
Fnomna,
I assume that you purchased your first house and moved straight into it. If so section 118-192 resets your cost base at the market value when you first rent it out unless you elect to leave your main residence exemption with your first home until you sell it. In the latter case the 6 years is relevant. Though I wouldn’t recommend the latter as this will expose your new home to CGT. Note you can add to the market value the costs of selling and any improvements you make while renting it out.
If you don’t rent before you sell and you sell within less than 9 months section 118-140 applies to allow you to exempt both homes as your main residence for a period of up to 6 months before the date of sale.
If you don’t rent it out the cost base will be your original purchase price plus buying costs, selling costs, rates, interest, insurance, repairs & maintenance during the whole period of ownership.
There is a free CGT booklet on our web site http://www.bantacs.com.au that covers all these issues in more detail.julia
You’re a champion Julia – just wish you were here when I was having the argument with Rob the Mortgage Adviser about the legislation regarding market val at start of 6 year exemption period….
Oh well, it’s pleasing to know that what I believed (and had been told) was correct is indeed correct [
]Cheers
MelThanks for your replies – much appreciated!
Originally posted by Julia:Fnomna,
I assume that you purchased your first house and moved straight into it. If so section 118-192 resets your cost base at the market value when you first rent it out unless you elect to leave your main residence exemption with your first home until you sell it. In the latter case the 6 years is relevant. Though I wouldn’t recommend the latter as this will expose your new home to CGT. Note you can add to the market value the costs of selling and any improvements you make while renting it out.So, really this 6 year rule would be of use if we were to rent a place ourselves and keep the old place as an IP.
If you don’t rent before you sell and you sell within less than 9 months section 118-140 applies to allow you to exempt both homes as your main residence for a period of up to 6 months before the date of sale.OK – this is what we are trying to do ATM.
If you don’t rent it out the cost base will be your original purchase price plus buying costs, selling costs, rates, interest, insurance, repairs & maintenance during the whole period of ownership.Do you mean if we DO rent it out? We would be able to reduce the ‘taxable capital gain’ by all these expenses.
There is a free CGT booklet on our web site http://www.bantacs.com.au that covers all these issues in more detail.julia
Thanks Julia – yes you are a champ – I will definitely take a look at that booklet.
If you don’t rent it out the cost base will be your original purchase price plus buying costs, selling costs, rates, interest, insurance, repairs & maintenance during the whole period of ownership.
Do you mean if we DO rent it out? We would be able to reduce the ‘taxable capital gain’ by all these expenses.
No I didn’t mean that. Firstly increasing the cost base and reducing the capital gain are the same thing as long as the market value rule does not apply. The market value rule only applies if the house is used to produce income. If no income is produced by the house but you exceed the 6 months overlap rule and give your main residence exemption to your new home, then some CGT will apply to your old home but there are lots of items that make up the cost base such as buying and selling costs, original costs, improvements and most of the costs of occupancy as you have not claimed them as a tax deduction.
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