This may seem like a silly question to many but im sure their are others out there like myself who are unsure about what CG tax is payable when positive gearing?
I understand after reading Steve`s book how CG tax on a negative geared house operates. ie 50% of gross CG is exempt then the other 50% is taxed at a income tax rate of around 48.5%
Is this the case with a positive geared IP? or is 100% of the profit exempt because no claims have been lodged with the ATO?
Hope this makes sense.Also was thinking of purchasing a property in the near future with a granny flat out the back ( will be my only property ).
Im single and will live in the granny flat whilst renting out the main house. This would enable me to accelerate payments on the property and build equity much faster.
Was wondering how this extra income will affect me in the future? Will it still be classed as my PPR or will it fall under a IP?
Has anyone done this before? ……….Share your experiences?
And what do other members think of this idea?Hi Hardyard
CGT applied to any property that you sell for a profit.
And if you rent out part of your home, you will lose part of the CGT exemption status. If you lived there initially and then totally moved out, you could still claim everything and get the CGT exemption for up to 6 years, if you claim no other property as your main residence during this time.
Terryw
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Hello Hardyard28
It’s possible that I have totally misunderstood your question in which case I’m sorry, but it seems to me that you are confusing income and capital gains.
Cash Flow positive or CF negative (also refered to as positive or negative gearing) refers to whether the income from your property ( rent ) is more or less than all your expenses ( e.g. interest on loan, rates, water, insurance etc) for the property.
If it’s more (CF +), then this extra income (profit) just gets added to your other income at the end of the tax year and you pay tax on it at your normal rate.
If it’s less (CF- ) then this loss gets subtracted from your normal income thus saving you some tax.
You always declare the income ( profit or loss) from your property to the ATO. It’s illegal not to.
Capital Gains Tax (CGT) is a different sort of tax which only needs to be paid when you sell the property. It normally does not apply to a PPOR but since you will be using part of your PPOR as an IP, then, for that part, CGT will apply.
The percentage to which CGT will apply will depend on several factors and is something better explained by your accountant. You might also like to go to the ATO site where it is explained with examples.
If you keep an IP for more than 12 months then you get a 50% discount on your capital gain. The rate of tax you pay for “the other 50%” is dependent on your top income bracket, as it just gets added to your normal income for that year. It’s not a fixed rate.
Again, if I misunderstood you I’m sorry for this simplistic answer.
Just trying to help.Elka
Hi hardyard,
I like your idea. Dont stress too much about tax, if your paying it, it means your earning money! Obviously, it would be good to minimise it, but i think that is a great idea to save money on rent, and still have an investment property.
Good on you for thinking creatively.
[specool]Thanks for your help Terryw and elkam.
elkam your information was excellent, the more simplistic the better. Their are a lot of newbies out there like myself. Well explained.Thanks audrey123 it`s only a idea at this stage, im just hoping their are people out there who are comfortable renting with the landlord so near. I guess you just have to be flexible and give each other plenty of space and the benefits for both parties will be enormous. ie any problems with the property could be bought to my attention to rectify immediately . Maybe even no need for a property manager if the right tenants are in place.
Another viewpoint. Westfield challenged the ATO on an investment property that it bought and sold. They argued that because it was an investmnet property it was an active asset and therefore was not subject to CGT. Westfield won and did not pay CGT because it was an investment proerty.
This may mean that all investment propertites may be considered as an ACTIVE ASSET AND ARE NOT SUBJECT TO CGT.[buz2]Church of The Holy Smokers
[email protected]Cosmocom, this could mean more tax. With the profit being classed as a capital gain you are entitled to the 50% discount. If it is not classed as a capital gain, then you don’t get the discount.
Terryw
Discover Home Loans
Parramatta
[email protected]
Sign up to my mailing list.
Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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