I just recently purchased my first home and I am having a bit of a dilemma. The place is a unit under a body corporate.
I received the first home owners grant for this and I intend to make this my principle place of residence as it is a property that should have good capital growth relative to rental cash flow.
However, I do not want to live in this house once settlement occurs. I want to rent the unit out.
Now, to pay no Capital Gains Tax on this property by claiming it as a principle place of residence once I sell is it true that you have to live in it for the first 6 months after settlement? Or is it fine to live in it in a 6 month period in the first 6 years? ps, I know you have to hold on to the property for more then 12 months to be CGT exempt if it is your principle place of residence.
I do not want to pay any Capital Gains Tax, if I was to rent it out for a couple of years but move in for 6 months in the first 6 years is that fine? Or does it have to be the first 6 months after settlement?
Apparently if you move in for a 6 month period within the first 6 years you can claim a pro rata principle place of residence Capital Gains Tax exemption for the time you were living in it? Is this true? I do not want this to happen once I sell. I do not want to pay any CGT on this . Does this mean I have to move in as soon as settlement occurs?How does a place get registered as a Principle Place of Residence?
Would this also mean I would lose my first home owners grant if I did not move in on settlement? Or does the same 6 year period rule apply?
You have to live in it for six months within the first twelve months to qualify for the first home owners grant.
To gain a PPOR exemption you must be able to prove via records that you actually lived in the house as your main dwelling.
http://www.ato.gov.au/individuals/content.asp?doc=/content/36883.htmsix year rule on keeping ppor while renting it out
http://www.ato.gov.au/individuals/content.asp?doc=/content/36887.htmHowever you cannot claim two properties as PPOR only one so if you buy another house and lived in it it is not PPOR if you are treating other original house still as PPOR.
It is now referred to by the ATO as Main Dwelling rather than PPOR.Apparently if you move in for a 6 month period within the first 6 years you can claim a pro rata principle place of residence Capital Gains Tax exemption for the time you were living in it? Is this true? I do not want this to happen once I sell. I do not want to pay any CGT on this . Does this mean I have to move in as soon as settlement occurs?
answer . YES if you move in after you rent it out this will occur and the 6 years you refer to is connected with the choosing PPOR exemption as pro rata will be for anytime period if you have rented it out.
SAY you rented it out for 10 years then moved in for 2 years and then moved out and claimed ppor 6 year rule after this
this is how it would work
10/18 of gain – cgt liable
2/18 of gain exempt
6/18 of gain exempt as you choose to keep PPOR exemption for 6 years
it is calculated on the days / total days I just am too lazy to work out the exact days.
http://calculators.ato.gov.au/scripts/axos/axos.asp?CONTEXT=&KBS=CGT_and_real_property.XR4&go=ok
http://www.ato.gov.au/individuals/content.asp?doc=/content/36888.htmNot sure on how you chose to make it still PPOR your accountant may know this.
thank you very much for your help.
My plan is to live in the place for 6 months after settlement, then rent it out legally through an agency and then go rent a place in the city for a couple of years. So if I do this can I still be CGT exempt
Its very important that this place is CGT exempt because the investment value to me is on price appreciation not on rental return. Therefore I am willing to do anything to meet the requirment of this being a principle place of residence. Does it make any difference if I only have one property? If you only have one property does it make a difference? Are the rules distinguishing principle place of residence from investment for those people who have multiple properties? Or does it make no difference? If you have one property but do not live in it it's still regarded as an investment?
ps I do not plan on buying anymore property in the future I will only have this one. Does that straight away mean it will be my Principle place of residence? Or can a place still be an investment property even though you only have one property
Does the 6 year income producing rule still apply if you rent it out straight after settlement? Or do you have to live in it first? then you get 6 year period? If so how long is this period? ATO site does not clarify this.
propertyboy wrote:Does the 6 year income producing rule still apply if you rent it out straight after settlement? Or do you have to live in it first? then you get 6 year period? If so how long is this period? ATO site does not clarify this.
First question – no, you must live in the unit first, to get access to the 6 year CGT free rule.
There is no fixed period for you to have lived in the unit. BUt you must be able to PROVE, if asked, that you lived there. You can do this by being on the electoral roll, chaging the address onyuor drivers license, having mail directed there, getting electricity connected etc.
The 6 year rule only applies if you are going to rent somewhere else, or move back in with parents etc, as you can only have one PPOR at a time.
Dan42 wrote:propertyboy wrote:Does the 6 year income producing rule still apply if you rent it out straight after settlement? Or do you have to live in it first? then you get 6 year period? If so how long is this period? ATO site does not clarify this.
First question – no, you must live in the unit first, to get access to the 6 year CGT free rule.
There is no fixed period for you to have lived in the unit. BUt you must be able to PROVE, if asked, that you lived there. You can do this by being on the electoral roll, chaging the address onyuor drivers license, having mail directed there, getting electricity connected etc.
The 6 year rule only applies if you are going to rent somewhere else, or move back in with parents etc, as you can only have one PPOR at a time.
^ I intend to rent my unit out and go rent an apartment in the city so I can be closer to work so trying to make two properties PPOR is not the problem, I just want this one to be PPOR.
Where does it say you have to live in it first straight after settlement?
So if you rent it out first it automatically become an Investment property?
propertyboy wrote:^ I intend to rent my unit out and go rent an apartment in the city so I can be closer to work so trying to make two properties PPOR is not the problem, I just want this one to be PPOR.Where does it say you have to live in it first straight after settlement?
So if you rent it out first it automatically become an Investment property?
That's right. If you rent it out straight away, you have never lived in it, so it can not be your principal place of residence. Main residence exemption is a question of fact, so if it is rented straight after settlement, it is an investment property, no main residence exemption applies and you are up for CGT.
If you live in the property first, you can then elect to treat the property as your main residence, if it is earning income, for up to six years.
Main residences are, usually, exempt from CGT. A property can only be your main residence if you live in it – otherwise it is not your residence!
Under s118-145 of the Income Tax Assessment Act you can be absent from your main residence for a period of up to 6 years and still claim it as your main residence, with certain conditions, and therefore avoid CGT on thie property.
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
^thanks for your help, but where does it say you have to live in it straight after settlement? If you have a 6 year exemption, why cant you just rent it out from settlement then move in within that 6 year period? Which section says you have to move in straight after settlement? I cant find this anywhere.
Why would it matter if you rent out for 5 years then move back in or live in it straight after settlement then move out for 5 years?
You have essentially rented it out for the same period but just moved in the place at different times.
propertyboy wrote:^thanks for your help, but where does it say you have to live in it straight after settlement? If you have a 6 year exemption, why cant you just rent it out from settlement then move in within that 6 year period? Which section says you have to move in straight after settlement? I cant find this anywhere.
Why would it matter if you rent out for 5 years then move back in or live in it straight after settlement then move out for 5 years?
You have essentially rented it out for the same period but just moved in the place at different times.
From s118-145 – Income Tax Assessment Act 1997
(1) If a dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence.
(2) If you use the part of the dwelling that was your main residence for the purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is 6 years. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence.
If you rented it out as soon as it settled, then it was NEVER your main residence. The 6 year rule is only if the house was your PPOR first. That's just the law.
Don't try to rationalise tax law, you will go crazy!
I just want to clarify as the couple of places i have read up on this, even on the ATO site to me wasn't quite clear. If you move in for 6 months and then move out for 6 years is that the only period that you can use the 6 year rule? Or could u move in for 6 months, rent out for 6 years, move in for 6 months and then rent out again for another 6 years and so effectively collect 12 years of rental, live in it for 1 year and claim CGT exemption for it all when u sold it???
Thats what that para 2 of the above seems to state Dan…
casanovawa wrote:I just want to clarify as the couple of places i have read up on this, even on the ATO site to me wasn't quite clear. If you move in for 6 months and then move out for 6 years is that the only period that you can use the 6 year rule? Or could u move in for 6 months, rent out for 6 years, move in for 6 months and then rent out again for another 6 years and so effectively collect 12 years of rental, live in it for 1 year and claim CGT exemption for it all when u sold it???Thats what that para 2 of the above seems to state Dan…
First point, there is no minimum amount of time that you need to live in the PPOR. But you have to be able to prove it.
But yes, you are correct, the 6 years 'resets' every time you move back into the PPOR, so as long as you move back in before the 6 years is up, then rent it out again, it will be CGT free.
If you rec'd the FHOG, you MUST reside in the place for a min of 6 mths within the first 12 mths of ownership or else you'll get caught out and have to repay FHOG plus penalities.
Dan42 wrote:propertyboy wrote:^thanks for your help, but where does it say you have to live in it straight after settlement? If you have a 6 year exemption, why cant you just rent it out from settlement then move in within that 6 year period? Which section says you have to move in straight after settlement? I cant find this anywhere.
Why would it matter if you rent out for 5 years then move back in or live in it straight after settlement then move out for 5 years?
You have essentially rented it out for the same period but just moved in the place at different times.
From s118-145 – Income Tax Assessment Act 1997
(1) If a dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence.
(2) If you use the part of the dwelling that was your main residence for the purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is 6 years. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence.
If you rented it out as soon as it settled, then it was NEVER your main residence. The 6 year rule is only if the house was your PPOR first. That's just the law.
Don't try to rationalise tax law, you will go crazy!
So how long do you have to live in it after settlement for it to become your main residence? Which bit of legislation outlines this length? Where does it say 6 months? And how do you go about registering it?
propertyboy wrote:So how long do you have to live in it after settlement for it to become your main residence? Which bit of legislation outlines this length? Where does it say 6 months? And how do you go about registering it?As I've said before, there is no set period of time that you have to live in the property, for it to become your PPOR.
You do, however, have to live in it for 6 months to qualify for the First Home Owners Grant. The FHOG is separate from CGT.
YOu don't have to register your house as a PPOR for CGT, but you have to prove it if asked. You can do this by changing the address onyour drivers licence, changing your adress on the electoral roll, getting electricity connected in your name….
TD 51 outlines the definition of principle residence
http://law.ato.gov.au/atolaw/view.htm?locid=cgd/td51/nat/atoNo time limit is specified there either.
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
you'd sort of imagine that getting the electricity connected in your name might be the most convincing of those eh… i mean electoral rolls, drivers licences, mail redirected all sound like a waste of time if your planning to only reside there a short time, but who lives in a house without getting the power connected… :o)
Just connecting electricity may not be enough – you have to establish it as your main residence. I have the electricity connected on a house I just built – its fairly common.
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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