A friend of mine bought a second property 12 months ago which is now his PPOR. He's been living between his first property and the new one up until recently.
He's undecided whether he wants to hold and rent the place out or sell it. If he rents the place out and sells it in 12 months what does it mean for CGT? This home was his PPOR for about 5 years and has never been used by him as an IP.
Many thanks,
Andrew
itsandrew
Go as far as you can see and you will see further.
You friend can still claim the 1st property if he wishes as PPOR (6 year rule) even if he rents out and negative gears whilst living in the 2nd one. As long as the rent is market rate,all expenses in holding that property are allowable. if loan redrawn or increased for for 2nd property then it needs to be apportioned appropriately . When he disposes of 1st property , see his accountant, and it should be CGT free. Unfortunately you can only claim 1 PPOR at a time so your friend will have to take this into calculations if he is thinking of ever disposing of the 2nd property. so for the period he cllaims 1st as PPOR whilst rented out will be taken of PPOR on sale of 2nd and CGT subject then.
Alternatively your friend can negative gear 1st property as above and when he sells then the capital gain calculation will be apportioned basically as follows:- length of time rented/length of time owned will give the percentage of profit (after all addbacks and deductions) onthe transaction that is subject to CGT and pay the appropriate amount when due. it may be more benefical that way.
Your friend will have to crunch the numbers 1st and make a decision which way he wants to go in regards to PPOR.
hi andrew,
the details of this situation are particularly important.. I’m curious as to why your friend was living ‘between’ the properties for this period of time.
Regardless of what that situation is, there are three pertinent cgt “rules”:
6 month ‘overlap’:
http://www.ato.gov.au/individuals/content.asp?doc=/content/36888.htmPPOR 6 year extension (that infra mentioned):
http://www.ato.gov.au/individuals/content.asp?doc=/content/36887.htm“home first used to produce income” rule:
http://www.ato.gov.au/individuals/content.asp?doc=/content/36910.htm&page=3&H3
-but to use this rule you would have to have primarily lived in the first residence for the whole 12 months, and the new residence ‘secondarily’points to remember:
1. he can claim the exemption on both properties for 6months, out of the 12 months he was living in both.
2. he can extend the ppor exemption on the first place for up to 6 years, but in doing so you would loose the exemption on the new house.
3. if the property was sold after 12 months of being a rental, and your friend lived in that property as a PPOR up until it became rented then the cost base for the purposes of calculating CGT would be market value at the time it was first rented. This is really important, and often results in substantial CGT savings.
4. your friend really really needs to talk to an accountant. the three rules listed above can have complicated interactions, for example, use of rule 2 will exclude the use of rule 3, and almost certainly result in paying more CGT than your friend has to. rule 1 also has ramifications for rule 3. The specifics of this scenario have ramifications for all three rules, and your friend needs to decide how he is going to “represent” the situation. And as infra said.. someone needs to do the math and determine the best course of action.
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