After reading thoroughly through these forums I have stumbled across some contradictory information on other websites with regards to PPOR becoming an IP and the role that the 6 year Temporary Absence Rule window plays. I would really appreciate some help with explaining these contradictions and how the CGT will actually play out.
To highlight this contradiction I have outlined a simple example below.
Situation:
I purchase a property in 2000 for 300k
I move into it immediately for say 2 years (2002), then move out and rent it out.
At this time I have the property revalued and it is 350k (2002).
I begin leasing from someone else where I live the rest of my days (i.e. I do not buy a second property at any point).
6 years later I again have my property revalued but I do not move back in and continue to lease it. The property is now 650k (2008). Temporary Absence Rule expires.
I continue to rent out the property for 4 more years and sell it in 2012 for 850k.
Understanding after reading these forums:
Based on my understanding from these forums, my 'Cost Base' is (ignoring other costs) the revalued Market Value of the property when I first began renting it (350k in 2002) - as per s118.192 of Income Tax Assessment Act ("You are taken to have acquired the dwelling or your ownership interest at the income time [Income time = the first time it was used for the purpose of producing assessable income] for its market value at that time").
This is despite the property continuing to be my PPOR for the next 6 years.
Therefore my capital gains are = (850k - 350k) * 50% * (10/12) = 208k.
Here I have assumed that if the 6 year window expires, the apportioning method must be used using the time it was rented vs time it was owned.
Understanding after reading YIP:
From this Q&A in YIP:http://www.yourinvestmentpropertymag.com.au/article/qanda-tax-implications-of-moving-into-an-investment-property-117587.aspx
It states:
"If you lived in the property when you first bought it and later rented it out, you can continue to deem the rental property as your home for up to 6 years which means there is no capital gains tax should you sell it within the 6 years even though you have rented the property out. However once the six years is up and the property is still a rental property it will be subject to capital gains tax on a pro rata basis. So, if you owned it for ten years and for the first six years it is deemed your home (no capital gains tax even though it was rented), then the last four years is subject to capital gains tax. Its important that you know what the property is worth on the sixth year to determine the capital gain from the sixth year to the tenth year. If you move back into the property before the sixth year is up than the six year rule starts again."
Here it says that my capital gains is based on the increase in value from the end of the Temporary Absence Rule expiration to the sell date ie:
(850k - 650k) * 50% = 100k
Questions
There are three points I would appreciate clarification on:
- Cost base: Do I use the 2002 Market value from the time of first renting, or the 2008 Market Value (the time the Temporary Absence Rule expired as YIP suggests).
- After I sell it 12 years after first purchase (and 10 years after moving out) do I apportion the capital gains based on "10 years rented/12 years owned = 0.833", or do I use "4 years as an IP (ie past Temporary Absence Rule expiry)/12 years owned = 0.333" OR is it, as YIP implies, apply no apportioning factor simply use the difference between the Sold Price (2012) and the 2008 Market Value (value at time of Temporary Absence Rule expiry) for the capital gains.
- If I move back into the property 2 years after the Temporary Absence Rule expired (2010) for 6 months, then move out and sell it 18 months later (2012) are those last 24 months exempt from capital gains? In fact does this reopen the 6 year window?
To highlight this contradiction I have outlined a simple example below.
Situation:
I purchase a property in 2000 for 300k
I move into it immediately for say 2 years (2002), then move out and rent it out.
At this time I have the property revalued and it is 350k (2002).
I begin leasing from someone else where I live the rest of my days (i.e. I do not buy a second property at any point).
6 years later I again have my property revalued but I do not move back in and continue to lease it. The property is now 650k (2008). Temporary Absence Rule expires.
I continue to rent out the property for 4 more years and sell it in 2012 for 850k.
Understanding after reading these forums:
Based on my understanding from these forums, my 'Cost Base' is (ignoring other costs) the revalued Market Value of the property when I first began renting it (350k in 2002) - as per s118.192 of Income Tax Assessment Act ("You are taken to have acquired the dwelling or your ownership interest at the income time [Income time = the first time it was used for the purpose of producing assessable income] for its market value at that time").
This is despite the property continuing to be my PPOR for the next 6 years.
Therefore my capital gains are = (850k - 350k) * 50% * (10/12) = 208k.
Here I have assumed that if the 6 year window expires, the apportioning method must be used using the time it was rented vs time it was owned.
Understanding after reading YIP:
From this Q&A in YIP:http://www.yourinvestmentpropertymag.com.au/article/qanda-tax-implications-of-moving-into-an-investment-property-117587.aspx
It states:
"If you lived in the property when you first bought it and later rented it out, you can continue to deem the rental property as your home for up to 6 years which means there is no capital gains tax should you sell it within the 6 years even though you have rented the property out. However once the six years is up and the property is still a rental property it will be subject to capital gains tax on a pro rata basis. So, if you owned it for ten years and for the first six years it is deemed your home (no capital gains tax even though it was rented), then the last four years is subject to capital gains tax. Its important that you know what the property is worth on the sixth year to determine the capital gain from the sixth year to the tenth year. If you move back into the property before the sixth year is up than the six year rule starts again."
Here it says that my capital gains is based on the increase in value from the end of the Temporary Absence Rule expiration to the sell date ie:
(850k - 650k) * 50% = 100k
Questions
There are three points I would appreciate clarification on:
- Cost base: Do I use the 2002 Market value from the time of first renting, or the 2008 Market Value (the time the Temporary Absence Rule expired as YIP suggests).
- After I sell it 12 years after first purchase (and 10 years after moving out) do I apportion the capital gains based on "10 years rented/12 years owned = 0.833", or do I use "4 years as an IP (ie past Temporary Absence Rule expiry)/12 years owned = 0.333" OR is it, as YIP implies, apply no apportioning factor simply use the difference between the Sold Price (2012) and the 2008 Market Value (value at time of Temporary Absence Rule expiry) for the capital gains.
- If I move back into the property 2 years after the Temporary Absence Rule expired (2010) for 6 months, then move out and sell it 18 months later (2012) are those last 24 months exempt from capital gains? In fact does this reopen the 6 year window?