Hi everyone. This is my first time posting on the forum!
I am currently looking at purchasing my first IP in Victoria and had a few questions. I am 24 years old, have saved enough for a deposit and currently live at home with my parents.
I will be investing for capital growth, in particular looking to add value through renovations. I am looking at purchasing a cheap/run down property (ideally a property with no existing leasing tenants), renovate it as soon as I get the keys and then either:
1) Sell it after the renovations for a quick profit then repeat with the next property
2) Rent it out once the renovations are complete (only if the property will provide positive cash flow)My questions are around the potential CG implications of my investing strategy. Given I currently live with my parents and do not own a PPoR, am I able to claim the property I purchase as my PPoR which would mean that when I sell it (whether its 2 months after purchasing it under strategy 1, or even say 2 years after purchasing it under strategy 2 if I decide to rent it out), I will not need to pay capital gains tax.
Are there any factors I need to consider to be able to do the above? I read a thread on here not long ago about someone being asked by the ATO to prove they actually lived in their PPoR since they were trying to avoid paying CGT upon selling their property).
Any other suggestions/criticisms/considerations on my investment strategy would also be appreciated. If I am being naïve about anything please feel free to point it out. I am trying to learn as much as I can before I take the first step.
Cheers,
Asheither:
1) Sell it after the renovations for a quick profit then repeat with the next property
2) Rent it out once the renovations are complete (only if the property will provide positive cash flow)re: 1) : be clear on entry costs, holding costs and exit costs to ensure you are actually making a profit and not taking a loss.
Entry costs are things like stamp duty, legal fees, mortgage related fees, title registration fees, having the electricity on during the renovation etc etc.
Holding costs are things like mortgage interest, council rates, water rates and insurance.
Exit fees are things like legal fees, early exit from mortgage fees, and selling agent fees.
Then of course there are your reno costs. Materials and labour and skip bins and such.
re: 2) : have an understanding of how a depreciation schedule might improve the cashflow of the property after the reno.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
All property is subject to CGT. However there are some limited exceptions such as a property being your main residence, being under 2 hectares, not used to produce income etc.
A property can only be your main residence if it is your main residence – i.e. you have to reside there. Move your stuff and live there sort of thing.
And just because you do live there doesn’t necessarily mean it will be exempt. If you are a builder or doing this to make money it won’t be exempt from CGT.
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
JacM – thanks for the reply. While I had considered some of those entry/holding/exit costs, I hadn’t considered other such as mortgage early exit fees and some legal fees. I might need to do a bit more research into how much these are likely to cost while analysing potential properties. Would you happen to know roughly how much these costs are as ball park figures?
Thanks Terryw. In relating to claiming it as my main residence, if I did sell the place after say 2 months, am I required to prove that I did live there during that time? If so, how would I prove that? Would I need to show the value of my bills, have my mail re-directed there etc?
You should retain evidence in case you are audited. If the ATO sent you a letter asking for evidence that the property was your main residence what would you give?
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
Mortgage early exit fees depends on things such as which lender it is, how much they charge, whether you were on a fixed rate when you exited, and whether LMI (lender’s mortgage insurance) was in play. Speak to your broker to gain a better understanding of this.
Legal fees depends on the fees of the legal eagles you recruit for your purchase or sale, and whether anything goes wrong along the way that they charge extra for. For a standard transaction a conveyancer might charge somewhere between $800 and $1300. Some charge more.
There are also legal fees charged by the bank. Again, speak to your mortgage broker about this.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Terry – that is what I was asking. In the case of being audited, how do people generally prove they lived there in that time? Would being able to reproduce bills showing electricity/gas/water being used along with having mail redirected to that property be considered sufficient evidence or do the ATO require some sort of other evidence?
JacM – thanks for that. I think I will definitely need to talk to a broker to fully understand the costs involved so I can take them into account when doing my analysis
It wouldn’t hurt talking to the experts in that field. Cherie Barber and Jane Slack-Smith, to name a few, are well known for their renovating tactics and may know some strategies regarding CG. Happy hunting!!
Andrew
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Email MeTerry – that is what I was asking. In the case of being audited, how do people generally prove they lived there in that time? Would being able to reproduce bills showing electricity/gas/water being used along with having mail redirected to that property be considered sufficient evidence or do the ATO require some sort of other evidence?
You will have to gather whatever evidence you can. Utility connectations and usage, mail, photos of you and your possessions there, drivers licence, electorial roll etc.
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
I think you would be in trouble under strategy 1 when it comes to the main residence exemption, as it looks to me like purely being a profit making scheme.
Strategy 2 – you will still need to ‘move in’ to the property first just making that clear, there are no hard and fast rules regarding how long and the necessary evidence required, the post above would be a pretty accurate representation of the evidence though.
I think you would be in trouble under strategy 1 when it comes to the main residence exemption, as it looks to me like purely being a profit making scheme.
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e.g. TD 92/135
Income tax: capital gains: is the main residence exemption relevant when the proceeds of sale of a dwelling are treated as income under ordinary concepts?
1. No. In cases where the sale of a dwelling gives rise to income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), for example. as part of a business or from an isolated profit-making transaction, that income remains assessable even if a main residence exemption is available for CGT purposes.2. The main residence exemption in Subdivision 118-B of the ITAA 1997 is a capital gains tax exemption only and does not extend to exempt from tax ordinary profits or business income.
Example :
A builder constructs a spec home in which he and his family reside while construction proceeds on another spec home. Any profit on sale which gives rise to income is fully assessable to the builder even if a main residence exemption is available for CGT purposes.
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 input guys.
Terry: are you suggesting that if I employed strategy #1 the proceeds may be classified as assessable income even though the property may be CGT exempt?
Yes, it is possible the CGT exemption won’t apply. But it will depend on the situation. If you are a builder then the ATO would be looking more closely at this.
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
I have a couple more questions relating to CGT which might be easier to explain with an example.
If I bought a house for $400k, spent the first 2 months renovating it (while the house is vacant) which cost me $20k and then immediately got it revalued for say $460k, then got tenants in and then sold it 2 years later for say $500k, what would be my cost base when calculating CGT?
I read that the revaluation acts as the new cost base if it is revalued before being rented out. Would this apply in the above scenario or does this only apply if the house is lived in before being rented out (as opposed to being vacant like in this situation)?
Only if you establish it as your main residence.
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
Wouldn’t the 6 year exemption rule apply if it was initially my PPoR though? Or am I missing something
Only if you establish it as your main residence.
Only if you establish it as your main residence before renting it out.
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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