If you lived in a property (let's call it "property A") as your PPOR for 15 years, then rented it out for 1 year while living in a new PPOR (property B), then you sold property A, what happens with CGT?
CGT for Previous PPOR
ForkSnorter on 27/05/2024 - 11:58
Comments
Google about the 6 year rule for PPOR
"You can't treat any other property as your main residence" - regardless of the 6 year rule you can only have one PPOR at a time.
6 year rule won't apply if Property B was treated as their new PPOR.
OP I believe the answer to your question is: You will have to pay CGT on the gain accrued during the rental period. The capital gain would be apportioned based on the number of days the property was used to produce income relative to the total ownership period. So 1/16 of the total capital gain is subject to CGT.
It's based on the market valuation at the time OP moved into the new property, rather than 1/16th of total value. The ATO allows for getting a market valuation as at a previous date, so OP will need to do this.
Thanks for the information.
@ForkSnorter: OP, do you own property B?
If Property B is a rental, then the 6yr rule will apply as you'd be claiming Property A as your PPOR still.
E.g. I currently live in my wife's townhouse. My last PPOR was rented out for 2yrs before I sold… no CGT paid.
@Mugsy: I don't think spouses can each claim a different PPOR and still satisfy the 6 year absence rule.
Yes I'm aware of that - but I wasn't going to cherry pick the answer for the OP. If you Google "6 year rule for PPOR" the top (non-sponsored) result is this ATO page.
On this page is an example similar to what the OP describes under "Example: ending the period covered by the choice early".
You will find that the OP can actually keep Property A as a PPOR under the 6 year rule even after moving to Property B (however, this would have consequences for the CGT of Property B), but can choose to stop this earlier and "swap" it to Property B. For example, if you move from a more expensive property (or one experiencing high capital growth) to a cheaper property (or one with low capital growth) it would be advantagous to not change your PPOR for tax purposes.
Also, in this case the OP would not be subject to 1/16 of CGT on Property A - but rather, the full CGT relevant to the 1 year period that Property A was no longer the PPOR (a valuation would be recommended immediately prior to renting out Property A).
Yep this is the correct response. 1/16th of CGT is your cost of selling.
You're meant to research this before selling "property A"
Happened to us recently.
Speak with the agency that manages the property for you and ask them to do an inflated valuation at the times you began to lease out the property
This is because CGT only gets calculated from when it began to be an investment property.Eg. If you sold for $1m and the valuation for 1 year ago comes in at $950k then the CGT is calculated on the $50K increase as opposed to the original purchase price
This is correct. In theory you should have got a valuation when it switched from being a PPOR to an investment, but its a common issue people face.
I faced this issue - I was able to convince my tax accountant what the value was when it switched to an investment based on similar sales in the area at the time.
It's not your accountant you need to convice, it's the ATO if you are audited.
Of course..
I don't usually use an accountant, but I did for this particular return because of this situation.
They assessed it the same way the ATO would so that there wouldn't be any issues later down the track.there wouldn't be any issues later down the track.
But if you fed your accountant bullshit numbers that don't match the ATO expectations then there will be issues down the track.
Just because you used an accountant doesn't void you of responsibility for errors or made up numbers.
@Muzeeb: I hear what you are saying, but it was not a case of 'here's some bs numbers chuck em in there'.
I specifically went to this trained professional to ask them the best way to help me go about this in a kosher way.
They provided guidance on the best way to go about it.@rambutann: When you said
I was able to convince my tax accountant
it sounded like you weren't using a genuine, reasonable estimate of the value. If you were, then indeed you shouldn't have any issues down the track.
The comment you replied 'this is correct' to also referenced inflated valuations.
Except it needs to be avaluation from a licenced valuer, not an appraisal by a real estate agent. You can still ask them to inflate it.
^ This
Also, that algorithm that realestate.com.au uses is considered an appraisal and not a valuation either. Some of those figures I wouldn't trust as the algorithm is only reliable when there's a lot of similar properties sold around the time it was calculated and not many dissimilar properties nearby being factored in. That last part requires a human to inspect the properties and filter to see if it should be included or not.
Not sure this is correct but we were told by a tax accountant that if you don't have a valuation at the time you started to rent it out that you can calculate it as a % instead.
eg Property owned for 5475 days (ie 15 years) and main residence exemption claimed for 14 years, but leased out for the last 365 days (1 year), you could calculate $200,000 gain divided by 5475 days and multiplied by 365 days to work out the taxable gain for the year leased out. So taxable income on $200,000 gain would be $13,334.
But in this case the 6-year rule may apply if you want to claim main residence exemption on that property instead of another one for that time period. But the main residence exemption can't be claimed for Property B for that same time period.
Yes, if you don't have a valuation (and I stress valuation i.e. that can only be done by a registered valuer… not an appraisal i.e. a guesstimate which can be done by a real estate agent, a sales person, their support staff with less than 1yrs experience) for when one started renting out a property, it will be based on a % instead.
I sold my first property that I had held since 2007 last year, I started renting it out in 2014 when I moved into the townhouse I had bought, and I didn't have a valuation for how much my property was worth in 2014. My tax accountant was able to portion this out as a %.
Worked in my favour… the bulk of the appreciation happened since covid.
But one should consult an accountant… for something like this. If one has to ask the question on a forum, then one doesn't know enough to be sure they're considering everything necessary to process this properly.
Can a valuer determine a value retrospectively?
It's been a while since I took my valuation subject at Uni but I believe it can be. I mean, all the data is there plus more if you do it retrospectively.
If you do a valuation for the current property price, there'd be a lot of sold but not settled properties that wouldn't be considered as the valuer wouldn't see those sales until after settlement.
Whether this is in your favour or not depends on the market at the time.
EDIT: Also assuming the property doesn't factor in any improvements that weren't there on the date one the valuer is valuing for. Or also the comparison properties used in the valuation either. I'm not sure how systems like RP Data or PriceFinder will record the history of houses if they've had an extra bedroom or two added on.
Yes.
Yep.
Basically you pick whichever option will reduce your tax the most. Although given the last year it's almost always going to be the % option as the price rises have been heavily concentrated on last 2 or so years.
IKR… it was actually beginner's luck in my case.
Whilst I'd honestly say I have more property knowledge than the average joe and was contemplating getting a valuation when I moved out of my first unit, I was super busy with my job at the time so didn't get around to it, and when I changed jobs, mum got breast cancer… and after she got past that, I was stuck dealing with defects at the second property… met my now wife during the last leg of the defects fiasco and then dealt with more defects with my wife's townhouse.
I was frustrated with myself last year when I realised that I needed a valuation and had forgotten to get around to it during almost a decade's timeframe. And then my accountant told me to just send her all my info first and she'd advise if I still needed one. I'm pretty sure she knew the answer was no given the crazy appreciation in the past 2-3yrs.
But the period of almost 5yrs after I started renting my unit out saw the price plateau… if I had sold prior to covid, I think the valuation method would have been more beneficial (though a lot less capital gains of course). I'll take the outcome I ended up with any day.
ask an accountant