HI,
Im new here and thought i'd post a question.
I own a (negatively geared ) investment property which has been rented out for 3 years.If i sold it as is today the capital gains made are minimal — around $50,000 -$100,000 before tax. I know if it was sold today I can use the discount method for calculating capital gains.The house is in an old fibro shack and I know that if i knocked it down and built a brand new home and then sold, my capital gains would be of the order $400,000. I understand that if I do rebuild for the purpose of selling straight away the, sale is no longer capital in nature, since it is a money making excercise and and any gains become assessible income and i will pay full income tax (i.e. no discount method for calculating gains).
I know that if i rebuilt and then rented for a further 12months, then after 12 months I could then use the discount method once more to calculate the gain. However I would rather not hold onto the property for that long .
I was thinking though, that i could move into the new house for a minimal amount of time – like 2 months – and then sell. so i would get a partial capital gains exemption for the time i lived there,and I would still beable to use the discount method for the remainder of o the gain. But this seems too good to be true — ANd im sure its not that easy to get out of a huge tax bill. ????
Also, It will take roughly 9 months to build and i will be paying bank interest on the property and construction costs. How do i treat these interest expenses? can i use this interest as a deduciton for the capital gains calculation at the end? It seems a bit tricky , since the interest incurred during this time is due to me building a main dwelling and not linked to the income derived on the property previously when it was rented out , so is that interest claimable?
Hope I've made sense, and hope someone can shed some light !
thanks in advance
josie
Josie_13 wrote:HI,Im new here and thought i'd post a question.
I own a (negatively geared ) investment property which has been rented out for 3 years.If i sold it as is today the capital gains made are minimal — around $50,000 -$100,000 before tax. I know if it was sold today I can use the discount method for calculating capital gains.The house is in an old fibro shack and I know that if i knocked it down and built a brand new home
This $400,000 capital gain do you increase your cost base by the cost of building a brand new home when working out the capital gain?
Josie_13 wrote:and then sold, my capital gains would be of the order $400,000. I understand that if I do rebuild for the purpose of selling straight away the, sale is no longer capital in nature, since it is a money making excercise and and any gains become assessible income and i will pay full income tax (i.e. no discount method for calculating gains).I am sorry but I do not know the answer to that question.
Josie_13 wrote:I know that if i rebuilt and then rented for a further 12months, then after 12 months I could then use the discount method once more to calculate the gain. However I would rather not hold onto the property for that long .I was thinking though, that i could move into the new house for a minimal amount of time – like 2 months – and then sell. so i would get a partial capital gains exemption for the time i lived there,
The point here is partial exemption. You can get a partial exemption for 2 months of the capital gain over three plus years..
That is 2/38 X capital gain is exempt and 36/38 x capital gain is taxable.
You most likely will find the gain over 3 years will come from the land value rather than from the building as the cost base will increase for the building construction costs.Josie_13 wrote:and I would still be able to use the discount method for the remainder of the gain. But this seems too good to be true — ANd im sure its not that easy to get out of a huge tax bill. ????Also, It will take roughly 9 months to build and i will be paying bank interest on the property and construction costs. How do i treat these interest expenses?
You would add the interest incurred during the construction onto the cost base however you can only claim one way at a time.
So if you receive rent then it is an expense against rental income
If you do not receive rent and cannot it is an expense incurred while increasing the capital value.There are about five elements to cost base it would fit into one of these elements.
http://www.ato.gov.au/individuals/content.asp?doc=/content/36557.htm&page=2&H2
Third element costs for loans used to finance capital expenditure you incur to increase an asset’s valueyou can only get a PPOR exemption (when you live in it) if you don't already have a PPOR!!
suggest you spend a few hundred and talk with a property accountant for some facts, as you stand to save it in tax!!You might be able to do it all without CGT, but probably you could not claim the interest as a deduction if you did this. I don't think the absence from main residence rule could apply.
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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