CGT if I sell

Section 118-145 of the Income Tax Assessment Act allows the main residence CGT exemption while the taxpayer is temporarily abscent for up to 6 years.

Terryw
Discover Home Loans
North Sydney
[email protected]

Hi Fluffy,

I like what you are thinking! And the answer is yes.

You do have to be careful though. You can only have one PPOR at a time, and there are tests as to what is your PPOR at any given time.

Some of the tests are as follows –

1. is this your electoral address?
2. is this your address for electricity services?
3. is this your address for postal mail?
4. is this where you actually reside?

In your relations with the ATO, I would strongly suggest that you do not try to hoodwink them and that you are truthful. If you claim that an IP is your PPOR for one year or more, then you had better have been actually residing in it for that time.

This should be something that can be evidenced by the testimony of your neighbours, your mail at the post office, the electricity account, your electoral address and the like.

The ATO accept a lap over period so that, where you are selling your PPOR and you move into an IP that becomes your PPOR for a time, the ATO accept that you do not pay CGT on your previous PPOR and that the IP has become your new PPOR.

Just ensure that what you are claiming is factual, that is that it actually happened. What you are proposing is completely legal and good tax planning.

If the reason for the absence is that you went to work overseas, so you always intended to come back to that house, that supports your case.

If the reason for the absence is that you moved to another State to work for a few years, and had the intention to return to that house as your PPOR, that supports your case.

Having said that, the ATO accepts that a person’s situation can change, so what was the PPOR no longer suits, eg additions to the family and the house is now too small, the relocation has become permanent, and the like.

So it can be a grey area, and you should be prepared to argue your case. And that does not mean that you have slim chances. You just have to have reasons and be prepared to argue them.

As a final warning, I would be careful about contrived situations. If it looks as though you only lived in the IP for one year with no intention to really establish it as your PPOR, in the absence of any strong reasons to the contrary, the ATO could deny your claim and charge you CGT.

Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nz

Monopoly

For more information on this please see.
CGT Determination Number 51
Capital Gains: What factors are taken into account in determining whether or not a dwelling is a taxpayer’s sole or principal residence?
http://law.ato.gov.au/atolaw/view.htm?locid='CGD/TD51/NAT/ATO‘

Terryw
Discover Home Loans
North Sydney
[email protected]

of course – you can only have one main residence (only one can be the main)

Terryw
Discover Home Loans
North Sydney
[email protected]

What a mess.
You can purchase another property & live in it and still exempt as your PPOR a property you previously lived in. You just can’t exempt both unless limited application of 6mth overlap see below.

The benefit of the six year rule (118-145) can be totally lost if you go one day over because of 118-192:
Make sure you count your fingers when the ATO introduces legislation designed to make your record keeping obligations easier. Section 118-192 was introduced to make complying with the CGT provisions easier for people who through change of circumstances rent out their own home. If, up until the property was rented out they had always used it as their home the section resets their cost base to the market value when it was first rented out. This is a practical solution because most people have not kept enough records while it was there home. The problem is section is not optional, it applies to homes first rented after 20th August, 1996. Interestingly, a year when market values had dropped considerably. The section is best explained by 4 examples where we will assume:
Property Purchased January 1993 for $100,000
Stamp Duty and Solicitor on purchase $7,000
Market Value in January 1998 was $120,000
January 1998 a tenant moved into the house.
The first three families sold their homes in January 2004 for $250,000. The fourth family sold their home in January 2005 for $250,000.
Commission and Solicitor on Sale $8,000
Holding Costs i.e. Rates, Repairs, Insurance, Maintenance and Interest are $7,000 per year.

Family 1:
Couldn’t move straight into the home when they first purchased it as tenants had a lease that ran for 3 months after settlement. The family lived in other rented accommodation during this time. So this family lived in the home for less time then the others. In January 1998 they purchased a new home and decided to rent out their old home. As the property was rented out before it became their home section 118-192 does not apply. Their capital gains are calculated as follows:
Stamp Duty, Solicitor and Purchase Price $107,000
Commission and Solicitor on Sale 8,000
Holding costs $35,000 less $1,750 when 1st rented 33,250
Cost Base $148,250
Selling Price 250,000
Capital Gain $101,750
Reduce for the period used privately 57/120 = 47.5% 48,331
Taxable Capital Gain $53,419
Less: 50% CGT discount 26,709
Amount on which tax is payable at normal rates $26,710

Family 2:
Moved straight into the house when they purchased it. In January 1998 they purchased a new home and decided to rent out their old home. They then sold their old home in January 2004 so 50% of the time it was their main residence. Section 118-192 applies. Their capital gains are calculated as follows:
Market Value when first rented – cost base $120,000
Selling Price 250,000
Capital Gain $130,000
Less: 50% CGT discount 65,000
Amount on which tax is payable at normal rates $65,000

Family 3:
Lived in their home for the full 10 years but made the mistake in January 1998 of accepting a small amount of rent from a friend who lived with them for a few months while waiting for a unit in a retirement village to become available. It is unlikely this will cause much capital gains tax to be payable but nevertheless the property will be subject to capital gains tax so are required to keep records from January 1998 onwards and incur considerable accounting fees having it calculated.

Family 4:
Moved straight in when they purchased the home but in January 1998 moved to a mining town and lived in employer accommodation. They thought the 6 year rule would protect their home from CGT but when they returned they decided to settle in the next suburb purchasing a house of the same value namely, $250,000. They didn’t sell their old house until 6 years and 1 day after the tenants first moved in. They did not move back into the old house. This means that they effective lose the benefit of the 6 year rule. Their capital gains are calculated as follows:
Market Value when first rented – cost base $120,000
Selling Price 250,000
Capital Gain $130,000
Less: 50% CGT discount 65,000
Amount on which tax is payable at normal rates $65,000
The tax on this will leave them a considerable gap when trying to pay for the home of the same value in the next suburb. In other words they have lost their main residence exemption and had to pay tax on nothing more than inflation not a real increase in wealth.
Family 1 who lived in their home for the least amount of time paid less than half the tax (depending on the tax bracket the gain pushed them into) that family 2 and 4 had to pay.
Another trap is if you sell the house within 12 months of first renting it out you will not qualify for the 50% discount. None of the above applies to properties purchased before 20th September, 1985.

Now to the 6 months over lap rule this cannot be used if the property being sold is used as a rental property in the 12 months preceeding the sale.
Section 118-140 Your main residence exemption applies to two homes for a period of up to 6 months. This is intended to allow you time to sell your old home after purchasing a new one. To qualify:
1) The first home must have been your residence for a continuous period of at least 3 months in the 12 months immediately preceding the date of sale.
2) If you were not living in the first home at any time during the 12 months preceding the date of sale it can not have been used for producing income (i.e. rented out or used as a place of business).
Note section 118-140 is not optional it must apply so if you have made a capital loss during the period of overlap you cannot claim it.

Sorry about the cut and paste but running out of time.

Julia Hartman
[email protected]
http://www.bantacs.com.au

Pete,

No need to move back in before you sell just as long as you have not been absent for more than 6 years in a row and you did live there first no CGT.

Julia Hartman
[email protected]
http://www.bantacs.com.au