Ask Ban Tacs Question
I bought Property 1, and moved into it, on 11 December 2003. The purchase price was $820K.
I bought Property 2, with a tenant in place, on 29 October 2004. The purchase price was $320K.
I moved out of Property 1 from 17 February 2008 – 30 June 2008, during which it earned income from holiday letting (during this time I lived with a friend)
I moved back into Property 1 on 1 July 2008.
I moved out of Property 1 on 1 July 2009, and rented a house myself, while both Properties 1 and 2 were rented out.
I moved into Property 2 on 25 November 2011, and intend to continue living there.
I intend to sell Property 1 in October 2014, and expect to get between $1.2m – $1.25m (will not sell for less but probably won’t get more).
I estimate Property 2 may be worth around $770K by October 2014 (it is valued at $700k now and the suburb is showing strong growth).
I have spent approximately $180K in capital costs on Property 1 (renovation cost, special strata levies, stamp duty)
Capital costs for Property 2 are negligible to date, but I intend to do a renovation in 2014/15 which will cost approximately $200K.
I expect to retire in June 2014, so expect to be in a low tax bracket in 2014/15
Questions
1. Is it possible to claim Property 2 as my principle place of residence from 17 Feb 2008?
2. If not, is it possible from 1 July 2009?
3. If either of the above two options are possible, given the smaller than expected relative growth on Property 1, would I be better to pay CGT on that property for the period from Feb 2008 – Oct 2014 (or July 2009 – Oct 2014), and claim Property 2 as my PPR for that period?
4. If neither of the above two options are possible, I assume I can definitely claim Property 2 as my PPR from 25 Nov 2011. In that case, would I be better to pay CGT on Property 1 for the period Nov 2011 – Oct 2014, and claim Property 2 as my PPR for that period?
5. If I decide not to renovate Property 2, would that change the answers to the above?
Answer
Because there was someone living in property 2 when you purchased it you cannot cover it with your main residence exemption until you actually live there ie 25-11-2011
So until this day you may as well cover property 1. You also have the option of continuing to cover property 1 with your main residence exemption until 1st July 2015 even longer if there is a period between 1st July, 2009 and 1st July 2015 when the property is not producing income. Section 118-45 ITAA 1997 gives you 6 years, since you last moved out, if it is producing income but it can be covered by your main residence exemption indefinitely if it is not earning income, while you are absent.
The first element of the cost base of property 1 will be its market value at 17th February 2008, section 118-192 ITAA 1997, assuming that it had not earned income in anyway before that date. You then increase this cost base by any expenses incurred after 17th February 2008 that have not otherwise been claimed as a tax deduction and increase the cost base by any building depreciation you qualify to claim as a tax deduction. This is particularly relevant to when you were living there, all holding costs are included in the cost base under section 110-25(4) ITAA 1997 even cleaning costs, light globes and of course interest, rates, insurance etc. When did you do the renos? They will only be included in the cost base if they were done after 17th February, 2008.
It might not work out too bad to cover property 1 as it is not the capital gain relative to the cost it is the actual dollar value that you should be concerned with and it would seem the more expensive property will produce a higher dollar capital gain.
Now the capital gain on property 2 is apportioned between the days it was covered by your main residence exemption and the days it was not. The whole gain is first calculated and then apportioned purely on a pro rata basis. Section 110-25(4) ITAA 1997 will allow you to also increase the cost base of property 2 by any costs not otherwise claimed as a tax deduction ie cleaning materials while you are living there and as you can see the way the formula works the costs associated with you living there effectively reduce the capital gain on the period you weren’t.
The only period of time you have a choice as to which property to cover is between 25th Nov 2011 and 1st July 2015 (possibly longer). Both properties are on a pro rata CGT calculation, property 1 from 17th Feb 2008. Property 2 right from the date you purchased it.
I do not have enough information to work out the best property to cover. I suggest you purchase my CGT calculator spreadsheet which you can make as many copies of as you like, then set up the various scenarios. http://www.bantacs.com.au/shopping_property_cgt.php You do not have to decide until you sell one of the properties.
How old are you? Superannuation may also be a way of minimising the impact of CGT by making some deductible contributions. The trouble is if you are over 65 and no longer working you will not be entitled to make these contributions so you really need to discuss your options in detail with your accountant.
As to whether to do the renos on Property 2 that is simply a question of whether they will increase the value of the property by more than they cost. No point if there is not going to be a profit and the ATO only want a very small percentage of the profit. Also get advice on the detail of the renovations you are going to make and when. If you substantially renovate the property (ie work is done on just about every room) then you will be required to charge GST when you sell it. This may make the renos not worth it, as GST is a tax on the selling price not on the profit so GST could apply even if you don’t make a profit. A major renovation could also be seen as a business venture by the ATO which will be taxed at normal income rather than the 50% CGT Discount.
