Ask Ban Tacs Question
We have sold what was our PPOR and moved into one of our investment properties that we have owned for 8 years, during which time it was continuously tenanted. We intend to live it the house for 1-2 years but will probably move out and re-let it for several years, then sell it. While we are living in the house, we will undertake some renovations and refurbishment using a LoC for the costs.
My questions are:
1) If we re-let it:
a) Should we have a new depreciation schedule done to cover the upgrades?
b) Is it correct that a new valuation isn’t needed when we move out?
2) If we sell the property in say 7 years – having rented it for the last 5 of these years – am I correct in thinking that the CGT will be apportioned ie it was rented for the first 8 years then was PPOR for the next 7 years so CGT will apply to 8/15 of the gain? And if we keep the house rented longer but don’t move back in after 6 years, will the eventual CGT still be apportioned to take account of the 6 years of being PPOR while rented?
3) I read in your book that it is important to keep a record of all ‘holding costs’ while we are living in it as these can be added to the cost base, but I don’t understand quite how this works. What expenses does this apply to? I assume that the costs of renovation and refurbishment, being of a “capital” nature, will be added to the cost base (and depreciated) but what expenses are classed as “holding costs’’? And, if we don’t re-let it but live in it until we sell it, does this principle – ie increase to the cost base by adding all holding costs – apply to the whole time we live in the house?
Answer
1) a) No you have to use the actual costs because you will have records. The catch with your arrangement is that you will not qualify for scrapping. Which is a write off for any unused depreciation on the items you destroy during the renovation. ID 2010/35 states that if the property is used for private purposes immediately before it is renovated then you cannot write off any unused depreciation on any of the items destroyed in the renovation process. This is fine if there is nothing left to write off. If not it would be better to renovate, or at least destroy the times that have depreciation left, before you move in there ie use it for private purposes. If the building is was built before less than 25 years from the date you demolish or after 16th Sept 1987 then it is worth getting a depreciation schedule before you demolish, if you don’t already have one.
b) no valuation needed the cost base can only be reset when it has not ever been used to produce income at that date.
2) I am assuming by the numbers you quote you are thinking about using the absence rule once you move out, which allows you to continue to cover the property with your main residence exemption for up to 6 years while it is producing income (infinitely if it is not producing income), providing you have first lived in it. But this means you will not be able to cover another place with your main residence exemption during that time. If you exceed the 6 years you will still be able to cover the property with your main residence exemption for the 6 years after you move out. If you move back in again the 6 years starts over. To make it clear on the numbers you quote. If you were to sell after owning it for 18 years and live there now for two years you could cover 8/18ths of the gain with your main residence exemption. If on the other hand you moved back in again before the 6 years was up then the property would only be exposed to CGT for the first 8 years that you rented it out so 10/18ths of the gain for be exempt under your main residence exemption. Reference 118-145 ITAA 1997
3) Yes the renos will be added to the cost base. And it covers any period you live there, basically any time that the property is not producing income because the only restriction is that the expense has not otherwise been claimed as a tax deduction. Other things you need to consider are any cost associated with the property. The legislation specifically includes maintenance this is a gold mine. Consider anything to do with looking after the house such as cleaning it and mowing the law. Get out your woollies dockets look for disinfectant and other cleaning materials. It is really only limited by your imagination. If it has anything at all to do with the house, keep a record. It is not just for the whole time you live there. It is basically anything that you have not otherwise claimed as a tax deduction. It is just that these are most likely to arise when you are living there. Reference Section 110-25(4) ITAA 1997
