CGT Main Residence Exemption (6 years)

[Thrawn]

Are you allowed to claim expense deductions on a rented out property under Main Residence Exemption status ?

Eg,

Buy a house in January 2007. Claim FHOG, Stamp Duty concessions, etc. Move in to the house immediately.
Move out of house in July 2007 (not to another PPOR). Rent it out (pay tax on rent income). Start claiming interest expenses on the mortgage, depreciation, repairs, rates and the like.
Sell or revalue in July 2013 and this date will become the new CGT cost base ?

In the meantime, not purchase another house as PPOR of course.

[DaleGG]

Hi and welcome to the forum

Yes, you can still claim interest, rates, insurance, repairs, and depreciation on both the chattels and the building (if appropriate) against your rental income even though the property is still your PPOR for CGT purposes.

This is because the costs are incurred in earning your income and the tax law says that as a result, they can be claimed.

I hope that you hang around for a while and contribute your knowledge, experience and opinions for us all to benefit whilst you are learning from the collective here.

Dale

Originally Posted by Thrawn

Are you allowed to claim expense deductions on a rented out property under Main Residence Exemption status ?

Eg,

Buy a house in January 2007. Claim FHOG, Stamp Duty concessions, etc. Move in to the house immediately.
Move out of house in July 2007 (not to another PPOR). Rent it out (pay tax on rent income). Start claiming interest expenses on the mortgage, depreciation, repairs, rates and the like.
Sell or revalue in July 2013 and this date will become the new CGT cost base ?

In the meantime, not purchase another house as PPOR of course.

[dave99]

You can claim deductions against your rental income regardless of the PPOR status. The PPOR status only affects whether you pay CGT.

For CGT, you can live away from your PPOR for up to six years before the PPOR exemption "expires". Also, if you move back in at any time, then move out again, the six years starts again.

Of course you can only have one PPOR at a time, so if you move out, the new place you live in cannot be your PPOR.

For more info: http://www.ato.gov.au/individuals/co...tent/36887.htm

- Dave99

[Thrawn]

Sounds like a great way to go for young guys like me starting "property investment" then. You can make use of your PPOR CGT exempt status from as early as possible before you start a family and have to move out of your parents house. Much better than a straight IP from day one.

The lack of deductibles and rent income for the first 6 months will be offset by the FHOG and stamp duty concessions. And you have 6 months to do minor renovations to improve the rent yield, increase the equity value and do a top-up on your loan for future "investment expenses". Plus you get a feel of "owning your own home" and living in it, for a short while anyway

[alexlee]

Originally Posted by Thrawn

Sounds like a great way to go for young guys like me starting "property investment" then. You can make use of your PPOR CGT exempt status from as early as possible before you start a family and have to move out of your parents house. Much better than a straight IP from day one.

I disagree. You could just buy an IP and never sell. You'll never have to pay CGT then. If you were a young person without a family, I'd suggest going for IPs first. Personally, I think the 6 year exemption isn't that useful because 6 years is a pretty short time when it comes to property.

Say you buy a property for $200k. In 6 years the propety goes up 50% to $300k (pretty standard). You pay zero CGT instead of 20% (assuming you make up to $100k salary + $50k CG). i.e. you save $10k. Sounds great, until you buy another IP for $300k which costs you more than $10k in stamp, etc. In any case, buying the IP in a trust could allow you to pay very little CGT if you have say a non-working spouse.

Originally Posted by Thrawn

The lack of deductibles and rent income for the first 6 months will be offset by the FHOG and stamp duty concessions. And you have 6 months to do minor renovations to improve the rent yield, increase the equity value and do a top-up on your loan for future "investment expenses". Plus you get a feel of "owning your own home" and living in it, for a short while anyway

Why not just do renos, etc to an IP? You still get to claim deductions.

You can always 'save' your FHOG for your actual PPOR. That feelign of 'owning your own home' is emotional only, as most of it is actually owned by the bank (though you control it, which is the important thing, anyway).

I'd suggest not getting emotionally attached to property that you 'control' (and, give the LVR, do not really own). Clouds judgement, IMHO.
Alex

[Thrawn]

Originally Posted by alexlee

I disagree. You could just buy an IP and never sell. You'll never have to pay CGT then.

Well, sooner or later, someone has to pay CGT (unless the law changes). Even when you die, your benefeciaries will have to pay the CGT if they sell the property. The interesting thing though, is CGT is a tax that can be deferred pretty much forever as long as you don't sell it. So that 6 years worth of CGT that you accumulate now, is in effect a very small amount of tax in 30 years when you sell.

Originally Posted by alexlee

If you were a young person without a family, I'd suggest going for IPs first. Personally, I think the 6 year exemption isn't that useful because 6 years is a pretty short time when it comes to property.

When you're young, 6 years is a long time. A lot can happen in that time, I might decide to start a business requiring a lot of extra capital, might move overseas, etc.

Originally Posted by alexlee

Say you buy a property for $200k. In 6 years the propety goes up 50% to $300k (pretty standard). You pay zero CGT instead of 20% (assuming you make up to $100k salary + $50k CG). i.e. you save $10k. Sounds great, until you buy another IP for $300k which costs you more than $10k in stamp, etc.

You actually save $20k in CGT on that example. CGT will hit mostly on the top bracket (40% odd), so $100K CG * 40% tax * 50% discount = $20k. There'd be a few things that will raise the cost base (agent fees, stamp duty, etc), but there's also depreciation deductions which will lower the cost base. If in 6 years I'm still staying with IPs, it'd be unlikely that I'd sell the property and buy another one. I can just revalue the property at that point start the CG clock, right ? (or move back in and reset the 6 year exemption clock).

Originally Posted by alexlee

In any case, buying the IP in a trust could allow you to pay very little CGT if you have say a non-working spouse.

Trust structures looks very interesting to consider. But since it'd be a few years at least before I can start seeing the benefits, the complexity and costs of setting up one from the start is probably not worthwhile. Its much more worthwhile when you have lot of IPs though, but it'd be quite a long while yet until I get there.

Originally Posted by alexlee

You can always 'save' your FHOG for your actual PPOR.
Alex

Since the value of FHOG doesn't seem to increase over time, its probably best
to take advantage of it as early as possible.

[dave99]

Perhaps the beneficiaries could hold on to the property too, and their children and so on down the line. No CGT ever! But if great-great grandson wants to sell 50 years later - wow that's a big CGT bill!

- Dave99

[trajik]

what about buying in your name for 6 years as PPOR exemption, then setting up a trust and transferring to the trust.

No CGT, only stamp duty, and you still have effective ownership

[carlau]

So what you setup a Trust account and sell the property and pay no CGT?

[alexlee]

Originally Posted by Thrawn

Well, sooner or later, someone has to pay CGT (unless the law changes). Even when you die, your benefeciaries will have to pay the CGT if they sell the property.

Not true. If they inherit from you, they get it at a cost base equal to the value as at the date of death. All capital gains racked up during your lifetime are in effect tax free. If you inherit from someone and sell immediately (at about the same value as at the time of death) CG is minimal. Beneficiaries only pay CGT on the CG that occurs between inheritence and THEIR death. During which they can use all the equity the previous person built up.

Originally Posted by Thrawn

When you're young, 6 years is a long time. A lot can happen in that time, I might decide to start a business requiring a lot of extra capital, might move overseas, etc.

True. My own experience (I'm 29 and it is now more than 6 years since I bought my first IP) as a young investor is that PRECISELY because things change you want to get some good assets under your belt early. Time is the investors friend and the younger you are, the more % of your salary you can save because you have fewer necessities. I've been working overseas for the last 6 years and I've also been investing in IPs. Now that I'm at the stage when I'm thinking about buying my own place, starting a family, etc (I'm staring down the gullet of 30) I'm REALLY glad I have those IPs.

If you start a business requiring a lot of capital, wouldn't you prefer to have a lot of IPs happily appreciating to give you the capital you need? Many of my friends are wondering how they're going to get a deposit for their PPOR, and in the past they've asked me why I was putting myself on the hook for such big mortgages. I now have no concerns about getting together a deposit to buy my own PPOR AND continue investing.

Originally Posted by Thrawn

You actually save $20k in CGT on that example. CGT will hit mostly on the top bracket (40% odd), so $100K CG * 40% tax * 50% discount = $20k. There'd be a few things that will raise the cost base (agent fees, stamp duty, etc), but there's also depreciation deductions which will lower the cost base. If in 6 years I'm still staying with IPs, it'd be unlikely that I'd sell the property and buy another one. I can just revalue the property at that point start the CG clock, right ? (or move back in and reset the 6 year exemption clock).

I got my figures wrong.

Depreciation is deducted at your full marginal rate (say 40%) and you pay it back at half 20%, so you're ahead there. As you say, if you're going to stick with IPs after 6 years, you're unlikely to sell. In 6 years, if the CG is bad the CGT exemption rule doesn't help much. If it's good CG, believe me you're not going to give up IPs. If you hit anything LIKE the cycle we've had in the last 6 years (and I've only averaged 7-8% a year) you're going to be hooked.

You could move back in, but you've said things change. I didn't want a house when I was 23 but I do now. Thinking 'I can always move back into it' limits your thinking to 'I'm only going to own one property'. Not the best attitude if you want to build a big portfolio.

Originally Posted by Thrawn

Trust structures looks very interesting to consider. But since it'd be a few years at least before I can start seeing the benefits, the complexity and costs of setting up one from the start is probably not worthwhile. Its much more worthwhile when you have lot of IPs though, but it'd be quite a long while yet until I get there.

Two main benefits to trusts: asset protection and income streaming. While it's -ve geared you could get the same effect holding property in your own name, so there is no immediate benefit. Asset protection is more of an insurance policy: I may not claim insurance every year but I happily pay the premium because I want the protection.

As for income streaming, if you get to the point where you use the benefit of, say, CG distribution to the lowest tax payer (when you sell), it's too late to change entities. You can't move ownership to a trust later without incurring stamp duty (based on the market value when you sell, which hopefully will be much higher than the cost now). Entity selection should be done FIRST.

Re lots of IPs.... you'd be surprised. After your first couple of IPs (which will be very hard to accumulate) the CG really takes over and it jumps exponentially. If you build it diligently, you'll have lots of IPs before you know it. That's why IPs are so attractive: fairly safe leverage.
Alex

[alexlee]

Originally Posted by carlau

So what you setup a Trust account and sell the property and pay no CGT?

You pay no CGT when selling your own PPOR, but the trust will have to pay stamp when buying it from you.

Which begs the question: if you plan to keep the property anyway, why not just buy it in the trust in the first place? And if you plan to keep it, why transfer it to the trust? Asset protection is fine, but you can just gear the thing up to the hilt to decrease equity in your personal name.
Alex

[trajik]

A couple of things, there is no CGT on inherited property if sold within 2 years of inheritance and the property was the deceased PPOR.

The cost base for beneficiaries of a PPOR inheritance is either the market value at death if the property was originally purchased prior to early 1985, or original cost base if purchased after early 1985.

Transferring the property to a trust would be beneficial to gain the CGT exemption, and then the new cost base would be the sale value, of course only if a trust hadn't been used originally.

[alexlee]

Originally Posted by trajik

A couple of things, there is no CGT on inherited property if sold within 2 years of inheritance and the property was the deceased PPOR.

The cost base for beneficiaries of a PPOR inheritance is either the market value at death if the property was originally purchased prior to early 1985, or original cost base if purchased after early 1985.

That would imply if a PPOR was purchased after 1985 and is passed onto a beneficiary, then it would be far better to sell within 2 years than to hold onto it, since CGT exemption disappears after 2 years?
Alex

[trajik]

Exactly,

Even if you went and bought another property straight away after selling, the savings in CGT may be substantial, but stamp duty must be considered on the new property.

[GIDDO]

Am I right in saying that an individual can claim a 50% discount on CGT on any sale of an investment property? (if purchased in an individuals name)

And that same individual can claim a total exemption of CGT on their own PPOR?

And if bought in a company name, the property is subject to CGT at 30% from the first dollar?

Doesn' t the CGT exemption make it pretty attractive to own a PPOR that is going to appreciate nicely; keep it a few years and then go again??

I don't mean that we should not have IPs as well; but I am asking whether people think a decent sort of PPOR, bought well, is a good idea, as long as you are prepared to swapp PPORs every 5 years or so??

Can someone knowledgable confirm this please?

Kind regards and happy new year to all from GIDDO