Ask Ban Tacs Question
Hi there.
I would like to confirm the following.
I have a client who had a PRR. It was purchased Nov. 2009. He lived in it till Feb. 2012 when it was first rented out. Market value at Feb. 2012 was $510,000. When my client moved out he rented another property and has not purchased another PRR. In May 2014 this property was sold for $487,000. He incurred $16,000 in costs getting the property ready for sale. As he had another property, only ever treated as an investment property (this was owned for 2 years) which was sold in the same year for a gross gain of $60,000 I am needing to confirm that he can claim the capital loss on the PRR, come rented property against the gain of $60,000.
Particularly can he choose not to apply the Temporary Absence rule to this property so that he can satisfy both conditions in S.118-192 i.e. 1) he would only obtain a partial MRE when the property was sold and 2) he would have obtained a full MRE if the dwelling was sold immediately before the first income time.
Also could you please confirm that if property was vacant due to selling for 4 weeks prior to sale that he would need to apportion all deductible rental expenses to the period of rental only?
Thanks Danny Gray
Answer
I would like to confirm the following.
I have a client who had a PRR. It was purchased Nov. 2009. He lived in it till Feb. 2012 when it was first rented out. Market value at Feb. 2012 was $510,000. When my client moved out he rented another property and has not purchased another PRR. In May 2014 this property was sold for $487,000. He incurred $16,000 in costs getting the property ready for sale. As he had another property, only ever treated as an investment property (this was owned for 2 years) which was sold in the same year for a gross gain of $60,000 I am needing to confirm that he can claim the capital loss on the PRR, come rented property against the gain of $60,000.
Particularly can he choose not to apply the Temporary Absence rule to this property so that he can satisfy both conditions in S.118-192 i.e. 1) he would only obtain a partial MRE when the property was sold and 2) he would have obtained a full MRE if the dwelling was sold immediately before the first income time.
Also could you please confirm that if property was vacant due to selling for 4 weeks prior to sale that he would need to apportion all deductible rental expenses to the period of rental only?
Thanks Danny Gray
Yes, you are correct. Section 118-145 (the absence rule) is optional – you can choose:
SECTION 118-145 Absences ITAA 36
118-145(1)
If a *dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence.
And section 118-192 is compulsory so you really have no other choice but to treat the capital gain this way. The only trap here would be if the client had maybe a boarder or ran a business from there ie it had been income producing before it became a rental. Here is the relevant part of 118-192 that makes it clear it is not optional:
118-192(2) View history reference
You are taken to have *acquired the *dwelling or your *ownership interest at the income time for its *market value at that time.
I have only experienced the ATO arguing that a property is the taxpayer’s main residence when they are actually living there. The argument was it is a question of fact. Implying the law does not give you a choice unless specified like in 118-145. I don’t accept the argument that a property you are living in must be covered by your main residence exemption if you own not other property, just because a fact is a fact. But in your case the fact is it is not his main residence so there is absolutely no grounds for the ATO to see things differently.
I assume that the property was not available for rent in those last 4 weeks. It would be difficult to argue it was truly available for rent under the circumstances. So no the holding costs such as interest, a month’s rates and insurance etc are not going to be deductible for that period. Now if this is the property that was sold at a profit you can use section 110-25 (4) to decrease the capital gain (but only back to zero) by these amounts as long as it was purchased after August 1991. But if we are talking about the property that was sold for a loss then these expenses are of no benefit for tax purposes because you cannot use section 110-25(4) to increase a capital loss.
Now on the other hand the cost of getting the property ready for sale maybe deductible against the rent as repairs utilising IT 180 assuming they were repairs that became necessary during the rental period http://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT180/NAT/ATO/00001
IT 180:
Accordingly, a deduction may be allowed for the cost of repairs to property providing:-
(a)
the necessity for the repairs can be related to a period of time during which the premises have been used to produce assessable income of the taxpayer, and
(b)
the premises have been used in the production of such assessable income of the year of income in which the expenditure in incurred.
If they are not repairs then they can increase the cost base and therefore the capital loss as improvements.
—————————————————————————————————-
http://law.ato.gov.au/atolaw/print.htm?DocID=PAC%2F19970038%2F118-145&PiT=99991231235958&Life=10010101000001-99991231235959
SECTION 118-145 Absences ITAA 36
118-145(1)
If a *dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence.
118-145(2)
If you use the part of the *dwelling that was your main residence for the *purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is 6 years. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence.
118-145(3)
If you do not use the *dwelling for that purpose, you can treat it as your main residence under this section indefinitely.
118-145(3A) View history reference
This section does not apply if the *dwelling was your main residence because of section 118-147 and ceases to be your main residence because of subsections 118-147(3) and (4).
View history note
Hide history note
118-145(4)
Example:
You live in a house for 3 years. You are posted overseas for 5 years and you rent it out during your absence. On your return you move back into it for 2 years. You are then posted overseas again for 4 years (again renting it out), at the end of which you sell the house.
You have not treated any other dwelling as your main residence during your absences.
You may choose to continue to treat the house as your main residence during both absences because each absence is less than 6 years.
You can make this choice when preparing your income tax return for the income year in which you sold the house.
View history note
http://law.ato.gov.au/atolaw/print.htm?DocID=PAC%2F19970038%2F118-192&PiT=99991231235958&Life=10010101000001-99991231235959
INCOME TAX ASSESSMENT ACT 1997
CHAPTER 3 – SPECIALIST LIABILITY RULES
PART 3-1 – CAPITAL GAINS AND LOSSES: GENERAL TOPICS
View history note
Hide history note
Division 118 – Exemptions
View history note
Hide history note
Subdivision 118-B – Main residence
Partial exemption rules
SECTION 118-192 Special rule for first use to produce income ITAA 36
118-192(1)
There is a special rule if:
(a) you would get only a partial exemption under this Subdivision for a *CGT event happening in relation to a *dwelling or your *ownership interest in it because the dwelling was used for the *purpose of producing assessable income during your *ownership period; and
(aa) that use occurred for the first time after 7.30 pm, by legal time in the Australian Capital Territory, on 20 August 1996; and View history reference
(b) you would have got a full exemption under this Subdivision if the CGT event had happened just before the first time (the income time) it was used for that purpose during your ownership period.
View history note
Hide history note
118-192(2) View history reference
You are taken to have *acquired the *dwelling or your *ownership interest at the income time for its *market value at that time.
118-192(3)
If your *ownership interest in the *dwelling *passed to you as a beneficiary in a deceased’s estate, or you owned it as the trustee of a deceased estate and the *CGT event did not happen within 2 years of the deceased’s death, you apply this Subdivision as if:
(a) you had *acquired the interest as an individual and not as a beneficiary or trustee of a deceased estate; and
(b) for applying the formula in section 118-185, your non-main residence days were the number of days in your *ownership period when the dwelling was not the main residence of an individual referred to in item 2, column 3 of the table in section 118-195.
Note:
There are special rules for dwellings acquired before 7.30 pm on 20 August 1996: see section118-195 of the Income Tax (Transitional Provisions) Act 1997.
