We’ve recently bought an investment property using the equity in our home. Due to an unplanned pregnancy, we are now considering selling our home and moving into our much larger investment property.
Our question is, if we sell our home (free of capital gains tax) and put the profits from the sale of our home into our investment property and move into the investment property, so it becomes our principle place of residence, are we still required to pay capital gains tax if we sell this new (ex investment property) even if we live there for a few years? We only bought the investment property in December 2003 and will need to plan to move in in January 2005. The investment property is being rented to tenants until January 2005.
We have a relatively small mortgage on our own home (P+I) and an IO loan on our investment property.
Or, should we sell our investment property after 1 year (and possibly make a small loss) and sell our own home and buy another home (not investment property).
We have spoken to an accountant about this yet there seems to be a lot of conflicting complexities involved in this….
We’d appreciate any advice!
Thanks
Richard & AmandaI owuld think that if you later sold your old investment property after living in it, then the CGT would only be applicable on the gain during the time it was rented out. It may pay to get a valuation done when you move in for this purpose.
Terryw
Discover Home Loans
North Sydney
[email protected]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
Amanda,
Any gain you make on the sale of the rental proeprty will be apportioned on a time basis. A valuation will only work if the home is going from being your own to being a rental not the other way. There are a few tricks available such as using section 118-140 to exempt the rental property as your main residence for up to 6 months before you actually move into it. There is also section 110-25 which reduces the gain by the interest, rates, insurance and repairs incurred while you were living there. This is done before the apportionment so it effectively reduces the capital gain while you were not living there. You need a big box and keep all your receipts. If you want more detail send me your e-mail address & I will send you my free CGT booklet.
Richard & Amanda,
It’s not complex, you simply need to get a sworn valuation for the property (costs about $400) when it is no longer a rental property and becomes your main residence.
If it turns out that you’re looking at a capital loss, then capital gains tax would be a nice problem to have. If a capital gain has arisen, don’t worry because you won’t need to pay it until you sell the place. So if you live there a long time, it’ll be a fraction of the total capital gain you make (unless you choose a really dodgy suburb[
]).Congratulations and good luck with the baby,
Faber (nearly a chartered accountant)
Faber,
Very interested in this idea that you can set a valuation when changing from a rental to a private residence. Could you quote me a ruling or section number?Julia
valuation at time of conversion from ip to ppor will make no difference at all. they simple proportion off the ip period vs ppor period at time of sale and work out the cgt that way.
regards,
julie
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