Hi,
Was wanting to know how capital gains is worked out, particularly on a property that was purchased as a PPOR and lived in for the bulk of the time and rented out for a couple of years before selling to purchase new PPOR?
I built and have had my home for 13 years and it was never intended as an investment, we have lived there 13 years, we want to move into a new home for about 5 years before selling the first home and buying a new home to move into.
Also, we have used redraw in our mortgage, but we wish to remove all the money extra when we put it up for rent. Any issues/recommendations?
Also, I just read that it is possible when I refinance the current PPOR I can make the loan larger and use the cash for other things, which I didn’t realise (I have a fair bit of equity in this loan).
How would this impact on the capital gains tax scenario?
Given the property was your PPoR it should be exempt from CGT under the 6 year exemption rule
How have you used redraw, eg if you deposited your salary and then withdrew to pay expenses you might have very little of the loan that the interest would be tax deductible on, as most of the current loan would have been contaminated by redraawing for other purposes than earning assessableincome.
So as a corollary you cannot make more of your interest tax deductible by redrawing, nor can you by increasing the loan unless the increase is used for invrstment purposes.
The issue is not what the security for the loan is, the issue is what has the loan been used for.
Also, I just read that it is possible when I refinance the current PPOR I can make the loan larger and use the cash for other things, which I didn’t realise (I have a fair bit of equity in this loan).
How would this impact on the capital gains tax scenario?
That would not result in any tax savings at all. It is NOT possible to increase the loan and claim the interest.
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
Thankyou for your answers. OK, I can see not much if any interest would count for tax from my own home turned rental. Meaning the rent will all be taxed as profit. And having never looked much into CGT, I did not know about the 6 year rule, thanks for giving me a starting point to research.
If I can refinance the home to a larger amount, it means I can have fluid equity, which means when I buy my ‘dream home’ I don’t have to sell my house to get the deposit, so I would rather it not be tied up.
Also, unless I increase it, the rent will cover much more than the debt, wouldn’t that be more useful as a lump sum (in an offset account) reducing debt in the other house, or not really? I guess if not, I can have the offset on the first house (meaning I can use it later) and use the cash each month to pay the mortgage on the new place?
And what about when/if I sell the place? I am reluctant to sell, having renters pay off the mortgage is attractive to me, but I may have to sell at some point to pay down the mortgage on my dream home, so would that result in some weird situation with capital gains tax (in the scenario I rent it for more than 6 years)?
Maybe I would be better off selling the property and buying a similar one? (But I am emotionally involved with this one lol).
You can only have one PPOR at a time. However, if the first property means so much to you that you want to try and keep it, then although you buy and move into the second property, you can still nominate the first property as your PPOR. To minimise capital gains on your second property you can include in its cost base items that you are not able to claim on tax eg interest, indurance, rates, maintenance etc. So for example you buy a place for $500K, pay interest at 5% on $500000 for 5 years, then you won’t pay any capital gains unless you sell for above $625K. This is a very simplified example. Unfortunately these costs such as interet, insurance etc can’t be claimed as a capital loss if you sold for less than $625000.
Yes if you kept the first property for more than 6 years and then sold you might have capital gains tax to pay. If you have lived in the first house from as soon as possible, then when you first rent it out the cost base is reset to its value at the day you first rent it out. So if your house and land cost $400K and the value when you rent it out is $600K then as a general rule you will never pay capital gains tax on the first $600K.
If you rent the place out get a depreciation schedule as that will help minimise any tax payable on the rent.
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