Hi all, this is my first post. This is by far the best forum on IP that I have found!
I'm thinking about building my first house in WA as an (initially) negatively geared investment property. My plan is to rent it out (i.e. for 9 months) after completion so that I may claim tax deductions during the construction phase. I then want to move into the house before the 12 month FHOG cut-off, and stay there for the minimum 6 month period to claim FHOG and Stamp Duty concession (a total $11k). After this the property will go back to being an IP and I will live in a rented house. I have attached a diagram in an attempt to illustrate.
Question 1. Is this legal in the eyes of the ATO and State Govt? So far I have not read anything to suggest otherwise.
Question 2. Can this property still considered my PPOR for CGT purposes? and if so, can I use the 6 year rule to claim a CGT exemption?
Question 3. When selling the property, can i still add the reduced stamp duty to the cost base for CGT purposes?
Question 4. Does moving in affect the claiming of MLI as a deduction? Or any other deductions for that matter? I understand that any borrowing expense over $100 must be claimed over a period of five years. If i am occupying the property at some time during the five years, do I simply reduce my deduction for that FY?
Any help on any of the question would be greatly appreciated
Why not move in first so the whole period can be considered as your main residence? If you rent it first any capital gain will be apportioned over time.
Will you pay stamp duty? if not you cannot claim it.
LMI would need to be apportioned
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
Hi Terry, thank you very much for your response.
Why not move in first so the whole period can be considered as your main residence?
Hi Terry, I was thinking that I would rent the property out initially in order to claim approximately $5k worth of deductions during the construction phase. My understanding is that if I move in initially, I will be unable to claim this deduction, even though my intention may be for the property to eventually become an IP. Is this correct?
What are the advantages of having this considered my main residence during the initial time?
If you rent it first any capital gain will be apportioned over time.
I think i understand what you are getting at here. We can take into account the time I was living there when calculating CG? So if I live in the property for 1/10th of the total time of ownership, I can reduce the CG by 1/10th?
In any case, if this is still considered my PPOR for CGT purposes. I wonder if I can avoid paying CGT on this entirely? I'm still confused about the caveats around the 6 year rule. I've read that you need a good reason with evidence to claim the 6 year rule. Can anyone confirm how people have used this in the past?
Will you pay stamp duty? if not you cannot claim it.
Yes. the land will be worth approx. 350k so as a FHOG i will end up paying a concession rate of approx. $6k in stamp duty (effectively saving $4k from the normal residential rate)
minds-eye wrote:I was thinking that I would rent the property out initially in order to claim approximately $5k worth of deductions during the construction phase.I'm not sure what 5K deductions your trying to claim during construction. It is my understanding that if the property in not available for rent, then you can't claim deductions.
With the CGT, if you have it as your PPOR initially, then move out with no other PPOR, then it can remain CGT free for a further 6 years. If you rent it out first, then move in, the CGT will be apportioned between time of ownership and the amount of time it was your PPOR.
BigCubez wrote:minds-eye wrote:I was thinking that I would rent the property out initially in order to claim approximately $5k worth of deductions during the construction phase.I'm not sure what 5K deductions your trying to claim during construction. It is my understanding that if the property in not available for rent, then you can't claim deductions.
With the CGT, if you have it as your PPOR initially, then move out with no other PPOR, then it can remain CGT free for a further 6 years. If you rent it out first, then move in, the CGT will be apportioned between time of ownership and the amount of time it was your PPOR.
BC, costs incurred while construction is happening, is potentially deductible. This was decided with the case of Steele about 10 years ago. Mrs Steele took about 10 years to develiop a property – in fact she never did develop the property (from memory) but she was still able to claim interest etc because she intended to rent the property out when she eventually developed.
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 the feedback guys.
I think I will be moving into the property first so I can take advantage of the "Main residence" CGT exemptions later down the track.
My next question would be – can I still treat this property as my "Main residence" if I rent it out and purchase another property to live in?
minds-eye wrote:My next question would be – can I still treat this property as my "Main residence" if I rent it out and purchase another property to live in?Possibly, but you can only claim one property at any time as a main residence (except 6 months overlap when selling).
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
Hi Terry,
In that case – If i sell my initial "Main residence" property and I then sell my second property (which I have been living in) two years later – Would it be true that I can never really claim my second property as a main residence for CGT exemption purposes?
Perhaps I would need to apportion the capital gain on my second property based on the following formula:
e.g. If i owned the property for 5 years, but another property was my Main residence for 3 years. I would be liable to pay tax on:
(5 – 3) / 5 = 60% of the total CG
10 years? That's a long development. So interest on a construction loan is deductible during construction if the intention is the rent the property? I was unaware of that. That's good to know
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