Forums / Property Investing / Help Needed! / CGT and negative gearing question

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  • Profile photo of Dave4455Dave4455
    Participant
    @qprjames
    Join Date: 2011
    Post Count: 5

    I read the below in a different forum by a high profile member back in 2011 :

    ……‘’’If you really want to avoid CGT and keep your negative gearing then you need to do things differently.
    Buy your house and then live in it for 12 months. Buy another house and move into it and rent the first one. You have 6 years before the first house will attract capital gains tax. Sell it before then.
    This can be continued but means that you are always moving but will allow you to buy progressively nicer houses once your equity builds up. You will however have all your eggs in one basket if you keep tying new properties to old ones with the bank’’’’….

    Is the above statement true today? I would have thought you would still need to pay 50% CGT even if you sold the house after 5 years (even if you lived in it as your PPOR for the first 12 months.)

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,213

    Hi Dave,
    I have a few concerns with that one.

    “If you really want to avoid CGT and keep your negative gearing ….”

    1. I don’t see where these two are related in any way – but, to be fair, perhaps they were answering a question from someone else who had referred to both CGT and -ve gearing. Not a big deal…..

    “Buy your house and then live in it for 12 months. Buy another house and move into it and rent the first one. You have 6 years before the first house will attract capital gains tax. Sell it before then.”

    2. Seems correct as far as the wording goes, except they have forgotten one major thing – the one you buy and move into CAN’T then be your PPOR if you are keeping the first one as “PPOR exempt” while you rent it. We cannot own TWO PPOR’s at the one time (except for a short period when changing from one to another). If you were to do it as mentioned in quotes, the SECOND house would NOT be CGT exempt (i.e. NOT your PPOR).

    “You will however have all your eggs in one basket if you keep tying new properties to old ones with the bank….”

    Eeekkk !! Sounds like they are cross-collateralising their houses. It IS a valid way to go, BUT it can cause major problems down the track – when trying to sell a property, or when wanting to switch lenders. We warn AGAINST cross-coll here.

    Actually, on a re-read, just like in 1. perhaps they are responding to an earlier comment, and this part of their reply was a warning (not a suggestion) to the one asking a question. On that basis, I am less concerned about that last bit now.

    But 2. remains as a major concern….

    Benny

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 15,850

    Yes still possible. 6 year rule. S118-145iaa97.

    But if second house sold it would be partially subject to cgt

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
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    Profile photo of TimbondinTimbondin
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    @tbondin
    Join Date: 2017
    Post Count: 0

    Dave, simply you can’t double dip. If you PPOR is house a and you live in and also own house b, the time frame you selected for house a being you PPOR will be used to calculate the CG in house B when you sell it. In saying that if you own house B for 30 years and sold house A 24 years ago I highly doubt there are any tools sophisticated enough to calculate what capital gains tax you owe not to mention the tax man isn’t that well coordinated. Hope this helps.

    Profile photo of StevenSteven
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    @steven1982
    Join Date: 2017
    Post Count: 95

    2. Seems correct as far as the wording goes, except they have forgotten one major thing – the one you buy and move into CAN’T then be your PPOR if you are keeping the first one as “PPOR exempt” while you rent it. We cannot own TWO PPOR’s at the one time (except for a short period when changing from one to another). If you were to do it as mentioned in quotes, the SECOND house would NOT be CGT exempt (i.e. NOT your PPOR).

    I think legally speaking, you do get a 6 months overlapping period….

    But I don’t know if ATO will want to consider one of them to be “partially CGT exempt” and back charge that partial CGT tax one way or another.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
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    6 month rule only applies when buying replacement home before selling old home.

    Also keep in mind no main residence cgt exemption when held on revenue account.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
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    Profile photo of Dave4455Dave4455
    Participant
    @qprjames
    Join Date: 2011
    Post Count: 5

    Yes still possible. 6 year rule. S118-145iaa97.
    But if second house sold it would be partially subject to cgt

    Hi terry, do you have a link about the above 6 year rule. I tried to search it online but can up with nothing. Thanks :)

    Profile photo of Dave4455Dave4455
    Participant
    @qprjames
    Join Date: 2011
    Post Count: 5

    Dave, simply you can’t double dip. If you PPOR is house a and you live in and also own house b, the time frame you selected for house a being you PPOR will be used to calculate the CG in house B when you sell it. In saying that if you own house B for 30 years and sold house A 24 years ago I highly doubt there are any tools sophisticated enough to calculate what capital gains tax you owe not to mention the tax man isn’t that well coordinated. Hope this helps.

    Hi Tim, yes I understand you theory on time being a good option for the ATO to ignore my situation and they won’t look back that far, but I’m definitely after a legal loophole (not a tax dodge) that I can use to my advantage which might suit my specific circumstances. I’d hate to find out 10years down the line, thee was something I could have done differently to save me lots of money! :p
    I’ve made that financial mistake in the past and it cost me a lot (which could have been legally avoided), so now I ask more questions before I jump into to anything! Haha

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
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    Here is a link to the legislation
    http://www8.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/itaa1997240/s118.145.html

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
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    Profile photo of TerrywTerryw
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    @terryw
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    Ideally you would live in every property you own initially to establish them as the main residence. Then you have a choice of which to eventually choose to be CGT. But you only have to make this choice on the sale of the first one. You would ideally reconisder each property after 5.5years since you moved out.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
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    Profile photo of Dave4455Dave4455
    Participant
    @qprjames
    Join Date: 2011
    Post Count: 5

    Ideally you would live in every property you own initially to establish them as the main residence. Then you have a choice of which to eventually choose to be CGT. But you only have to make this choice on the sale of the first one. You would ideally reconisder each property after 5.5years since you moved out.

    Thanks terry, so as an example, if I bought house A in Jan 2020, used it as my main residence, then bought house B in feb 2021, and moved into ihouse B as my main residence (and rented out house A), I’d have until mid-2025 to decide which house I would like to consider as my main PPOR before selling one of them?

    This scenario is quite important as house A is likely to be an apartment in docklands, Melbourne (an area which is completely over developed, but possibly undervalued) and the second house will be a house on a very big block in rural Victoria.

    So it is fair to say, it would be very hard to pick which might rise in value in 5years time, if I wanted to sell up.

    Profile photo of TerrywTerryw
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    @terryw
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    You only choose at the point of sale.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
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    Profile photo of BennyBenny
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    @benny
    Join Date: 2002
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    Hi Dave,
    I went looking for this topic as it expands on what has been discussed so far re CGT and a PPOR.
    https://www.propertyinvesting.com/topic/5031769-retrospective-property-valuation/

    The REALLY important bit is Terryw’s answer to my question here:-

    So, am I right in saying we would not be lying to nominate one place as PPOR for State records, and another for Federal records?

    His answer was a HUGE learning for me, and required reading for all I think.

    The latter part of the topic heads off in another direction, but the major parts (for you) go through to the posts dated 15 Dec 2016 – after that date the topic has changed, so later replies are far less relevant to your post.

    Benny

    Profile photo of Dave4455Dave4455
    Participant
    @qprjames
    Join Date: 2011
    Post Count: 5

    Ideally you would live in every property you own initially to establish them as the main residence. Then you have a choice of which to eventually choose to be CGT. But you only have to make this choice on the sale of the first one. You would ideally reconisder each property after 5.5years since you moved out.

    Hi terry, sorry to re-visit this. Just trying to make it clear in my mind! I did check the link but it was overly clear in regards to the 6 year rule. In my scenario of buying and living in house A in year 1, and then buying house B 12 months later in year 2 (whilst putting house A up for rent) how does the 6 year rule work out?

    You mention 5.5 years in the last statement. Is that because you think I need to sell one of the property’s and decide which of the properties I wish to have the capital gains put against before the exact period of 6 years is up…..Or is it because I need to give myself 6 months breathing space prior to the 6 years to move back into the house which I think will make the most gains and therefore will need to make it my PPOR?….. Or is it because I need to wait for minimum 6+ years to pass to sell?

    Or perhaps the 6 rule (whatever it states) isn’t even going to affect me and I should be more concentrating on being resident in each property for 12 months. I think the original comment I quoted on has got me other-thinking things!

    Sorry if I haven’t worded the above very well :-/

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 15,850

    Property A or B could be treated as the main residence for cgt purpose, but full exemption only available on one of them and only for a Max of 6 years absence. If you don’t sell within six yrs you could potentially move back into each of them, at different times, and before the six year rule and then get the potential to extend the main residence cgt exemption on either of them.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
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    Profile photo of TerrywTerryw
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    @terryw
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    Say you did buy A and B say 12 months apart. You lived in each of them for 12 months and then moved out and rented. 5.5 years after moving out of A you move back in and 5.5 years after moving out of B you move in for 12 months.

    Then after about 12 years of ownership of property A you decide to sell it.

    At this point either A or B could be cgt exempt completely but not both. So now you need to do some number crunching and work out is it better to avoid cgt completely now and potentially pay it on the sale of B later or is it perhaps better to not claim A as the main residence and keep the exemption going for B.

    It could be worth paying a little bit on A to avoid a big bit on B later.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://www.terryw.com.au
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    Lawyer, Mortgage Broker and Tax Advisor (Operating Remotely)

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