All Topics / Help Needed! / Capital gains tax???

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  • Profile photo of chook77chook77
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    @chook77
    Join Date: 2007
    Post Count: 3

    Hi,
    My husband and I are looking at buying a home in Townsville to renovate. We would like to know if you have to live in it straight away to get the CGT discount or is it anytime in the first 12 months.  Also we have heard that if you sell it after owning it for 6yrs, it also helps with CGT. Please any advice would be great, we are new to this.
    Thanks.

    Profile photo of CattleyaCattleya
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    @cattleya
    Join Date: 2008
    Post Count: 121

    Hi Chook77,

    50% CGT discount is only after you have hold the property for 1 year.
    0% CGT is for your principal place of residence. The other experts can correct me on this, but you can claim PPOR to a property even if you are renting somewhere else.

    Kind regards,
    Cattleya

    Cattleya

    Here to learn the ropes of property investing & share knowledge, not trying to sell anything at all.

    Profile photo of cbrown56cbrown56
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    @cbrown56
    Join Date: 2008
    Post Count: 1

    Dear Chook77

    Cattleya is correct – to clarify – 1) to obtain the discount you don't need to ever live in the property – just hold the property for a minimum of 12 months from purchase contract date to sale contract date, i.e. not settlement dates.

    2) "Also we have heard that if you sell it after owning it for 6yrs, it also helps with CGT." – This is the case if the property has been your principal residence, i.e. you have to have used it as your principal residence at some stage of the ownership of the property, e.g. if you actually live in the property as your principal residence from the first date of possession then leave it and rent it for up to 6 years the property will be free of CGT when you sell it., but you can only have one principal residence (for CGT purposes) at a time. If you hold the property for more than 6 years after having occupied it as your principal residence, the exemption from capital gains tax applies to the full period of ownership to the end of the 6 year period, but not to the period after the 6 year period.

    I hope this helps.

    Craig

    Profile photo of FireflyFirefly
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    @kiz
    Join Date: 2004
    Post Count: 30

     Hi Chook,

    I have just learnt from my mistake… i just renovated a property which i had tenanted for 12months before moving into it. I lived in it as my PPOR whilst i renovated and thought that i would not have to pay any CGT… but alas, i was wrong!

    If you plan on turning it over quickly, it needs to be your PPOR from the day of settlement which means either living in it or having it vacant whilst doing work but NOT having tenants. If you put tenants in first you still get a CGT discount, for every day it was tenanted and you match that period of time living in it you get a pro-rata discount… for eg…. My place was tenanted for 12 months. I then lived in it for 6 and on-sold it. I get 50% CGT discount for holding it 12 months then i get another 50% off that because i lived in it for 50% of the length of time it was tenanted. I hope this hasn't confused you but i was unaware of this rule until the visit to my accountant. To be 100% sure of all taxes you would have to pay i would strongly advise that you tell your accountant what you plan on doing so they can fill you in, after all, its their bread and butter! Hope this helps :)

    Profile photo of pinknic20pinknic20
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    @pinknic20
    Join Date: 2007
    Post Count: 52

    hello

    can i throw a question in if i own an investment property and wish to sell it after 12 months of owning it (it has been tenanted since day dot) what capital gains tax will i pay?

    Profile photo of CattleyaCattleya
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    @cattleya
    Join Date: 2008
    Post Count: 121

    Nicole,

    Your CGT would be:

    + Sale price
    – selling expenses ie. legal & Real Estate agent fees
    – all renovation expenses that has not been claimed as tax deductions
    – expenses you incurred when you purchased the property ie. stamp duty, mortgage duty, legal cost, conveyancer fee, etc.
    – all other expenses you have not claim.
    x 0.5 (this is because only 50% of your net sale proceed is assessable)
    = The result is taxable income.

    The taxable income + your wage + other income = Total taxable income

    The tax rate is applied as per existing tax rates ie. 15%, 30%, 40%, etc… I might be wrong with the tax rates here, but hope you get the idea.

    Kind regards,
    Cattleya

    Cattleya

    Here to learn the ropes of property investing & share knowledge, not trying to sell anything at all.

    Profile photo of chook77chook77
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    @chook77
    Join Date: 2007
    Post Count: 3

    Thanks very much for the advice, that makes it very clear. We will see an accountant as well, but we appreciate advice from people who have done it already, so thanks heaps!
    Chook

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,024

    The calculation given needs modification because the Cost Base needs to be reduced by the amount claimed during the term of ownership for items such as Building Write off.

    The Taxable income then needs to be apportioned between the ownership i.e Joint Tenants or Tenants in Common.

    Hence the need for planning the sale to ensure that the Gain is added to your income in a year when it maybe lower than normal.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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    100% Investment Finance now available on selected properties. Email us for further information.

    Profile photo of DraconisVDraconisV
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    @draconisv
    Join Date: 2006
    Post Count: 319
    Keira wrote:

    If you plan on turning it over quickly, it needs to be your PPOR from the day of settlement which means either living in it or having it vacant whilst doing work but NOT having tenants. If you put tenants in first you still get a CGT discount, for every day it was tenanted and you match that period of time living in it you get a pro-rata discount… for eg…. My place was tenanted for 12 months. I then lived in it for 6 and on-sold it. I get 50% CGT discount for holding it 12 months then i get another 50% off that because i lived in it for 50% of the length of time it was tenanted.

    Does this mean that instead of paying 50% of the CGT you pay 50% of the 50%(so 25%, like a 75% discount).

    Also then say i rent it out for first 6 months, and then live in it as ppor for 3 months, again same deal, but if i live in there the same amount of time as the tenanted(6months/6 months) then i get a 100% discount on the 50% discount and pay no CGT..

    Is this all correct??

    Chris.

    Profile photo of CattleyaCattleya
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    @cattleya
    Join Date: 2008
    Post Count: 121

    CGT is calculated pro-rata to how long it's tenanted.

    Hold: 18 months.
    PPOR: 13 months
    Tenanted: 5 months.
    taxable net profit from property sale: 50k.
    Cgt is calculated as : $50k x 50% x (5/18) x your tax rate

    Cheers,
    Cattleya

    Cattleya

    Here to learn the ropes of property investing & share knowledge, not trying to sell anything at all.

    Profile photo of dotohdotoh
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    @dotoh
    Join Date: 2009
    Post Count: 3

    Hi there,
    I have read through your comments, but haven't found an answer which fits my situation:
    I have the opportunity to puchase a property for a very cheap price (less than its market value). The property is already tenanted.
    I am looking at leaving the tennants in for another 12 months or so. While they are in there, the property needs a few maintainance issues dealt with (i.e. new carpet, replace showers, etc.). After the 12 months, I wish to move in and use it as my ppor for say 2 years before on-selling. What would be the cgt implications for me if I sold the house with a substantial profit?
    Thanks, dotoh

    Profile photo of elkamelkam
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    @elkam
    Join Date: 2006
    Post Count: 722

    Hello dotoh

    Actually your situation is pretty much the same as that described by KIZ in the post above except your numbers are different.

    BTW the two items you described as maintenance are in fact not fully tax deductible as repairs. They are both capital expenses and you will only be able to depreciate them while the place is a rental. Also when you sell the property this depreciation will be taken into account for the purpose of working out the capital gain. 

    In the scenario you describe, if you expect to make a substantial capital gain you may find that the CGT you will pay will far outweigh any benefit of being able to deduct interest and repairs in the first year.

    If you were to genuinly live in the property as your PPOR for the first 3 months you would avoid all CGT problems.     

    If I were you I would go to an accountant and get some advice about this before I signed any contracts.

    Cheers
    Elka

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    You can claim an exemption from CGT if your PPOR was rented for up to 6 years. But to qualify as a PPOR you will need to live in it first.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of dotohdotoh
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    @dotoh
    Join Date: 2009
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    Hi there, I have another question: If my friend sells me his property for around $170,000 AUD,  however the true value is around 280,000AUD. Although it's a generous offer, I am unsure of what the CGT tax implications are for him, as the property has been and still is currently an investment property (the tenants will move out when the property sells & it will become my PPOR). Will the ATO bill him for the true value of around  $280,000AUD or process his tax at the sale price of $170,000  AUD. BTW he paid around $167,000AUD about 5 years ago for the property.
    Thanks. dotoh

    Profile photo of TerrywTerryw
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    @terryw
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    ATO will assess on whatever he puts down on the forms. But if they do an audit they may pull him up. CGT is supposed to be payable on the market value.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of god_of_moneygod_of_money
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    @god_of_money
    Join Date: 2008
    Post Count: 970

    Cattleya,

    where did you invent such the formula?
    You would get exemption up to 6 years, unless you have more than one PPOR

    Profile photo of god_of_moneygod_of_money
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    @god_of_money
    Join Date: 2008
    Post Count: 970

    dotoh,

    get a valuer to value the property (tell him/her for tax purpose calculating CGT).
    So you will have a proof if get audited.

    Profile photo of Dan42Dan42
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    @dan42
    Join Date: 2008
    Post Count: 619
    god_of_money wrote:
    Cattleya,

    where did you invent such the formula?
    You would get exemption up to 6 years, unless you have more than one PPOR

    The basic formula shows the time it was used as a rental property, generating income, as a percentage of the total ownership period.

    In practice the 6 year exemption is not a common occurrence, as most people generally have a PPOR.

    Profile photo of finance2011finance2011
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    @finance2011
    Join Date: 2011
    Post Count: 1

     Hi, I have a question:

    Lets say we  actually live in a property as your principal residence from the first date of possession . Then due to work change, you go to another city/state and buy another property and live in that one. During this time, you leave the first property and rent it for up to 6 years. Is this property free of CGT when you sell it.? 
    I have read that you can only have one principal residence (for CGT purposes) at a time. How does this affect when you are living on the other owned property.

    Thanks

    Profile photo of Dan42Dan42
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    @dan42
    Join Date: 2008
    Post Count: 619
    finance2011 wrote:
     Hi, I have a question:

    Lets say we  actually live in a property as your principal residence from the first date of possession . Then due to work change, you go to another city/state and buy another property and live in that one. During this time, you leave the first property and rent it for up to 6 years. Is this property free of CGT when you sell it.? 
    I have read that you can only have one principal residence (for CGT purposes) at a time. How does this affect when you are living on the other owned property.

    Thanks

    Correct, you can only have one PPOR at a time. When people leave their property and rent it out, they are usually renting themselves in their temporary location. If you were renting yourself, you would only have one PPOR, and it would be CGT free for up to 6 years if you were renting it out.

    IF you have bought somewhere else, you can still elect to classify the first PPOR as your main residence, and it would be exempt from CGT.

    However, your second PPOR would be subject to CGT, from the time it was purchased to the time the first PPOR was sold.

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