CGT Calculation When Rented for Longer than 6 Years

Question

Just seeking to clarify that I am calculating capital gains and income tax correctly for the property I sold this year.

I bought a derelict home for $38K in 1991, renovated it and moved in 1994 with my partner. We moved out in 2010 and rented it out 2010-2018 for $800/month. 10K was spent to prepare it for rental. We moved to live in another town in a home we purchased.

From 2018 onwards I spent 40K to renovate to prepare the property for sale. The property was sold in February 2021 for $650K with 18K selling costs. I estimate the home to be worth 300K in 2010.

The title was solely in my name. I am treating it as my main residence and use the 6 year rule in my CGT calculations.

I did not include rent income in my prior tax returns, believing it was less than expenses. That was a mistake, and I am now preparing amendments for the ATO for those years. I will engage a quantity surveyor so that I can claim depreciation/building write-off for 2010-2018.

Referring to ATO’s calculation for Roya who has exceeded the 6-year limit, I substitute my own figures:

https://www.ato.gov.au/individuals/capital-gains-tax/property-and-capital-gains-tax/your-main-residence-(home)/treating-former-home-as-main-residence/

  • Capital gain (capital proceeds – cost base): 650k – (300k + 18k + 40k + 10k) = 282k
  • Days owned since rented (between 2/8/2010 and 15/2/2021) = 3850
  • Days over 6 year limit (between 2/8/2016 and 4/1/2018) = 520
  • Assessable capital gain: 282k x (520 / 3850) = 38k
  • Net capital gain with 50% GST Discount = 38k/2 = 19k

Calculating an income amendment for a typical year from 2010 onwards:

  • Rent: 800 x 12 = 9600
  • Expenses (rates, interest, insurance, repairs and maintenance, trees, floor tiles) = 4000
  • Fixtures & fittings / building writeoff = 1000 (subject to quantity surveyors report)
  • Net income 9600 – (4000 + 1000) = 4600

Julia, I have done a lot of reading on Bantacs and Ato website, and believe I have got it right. But I would really value your confirmation that I have included the necessary things. Does it look ok?


Answer

1991 to 1994 section 118-150 would allow you to cover the property with your main residence exemption during the renovation period even if you were not living there as long as no one else was living there. And as long as you moved in promptly after the renos were finished and you were not covering another property with your main residence exemption

1994 – 2010 of course it was covered with your main residence exemption.

Note section 110-25(4) does allow you to increase your cost base by holding costs etc but only if the property was acquired after August 1991 so you can’t use that until the reset in 2010.

In 2010 when the property was first rented out section 118-192 see below, took effect. This is a compulsory reset.

SECTION 118-192 Special rule for first use to produce income

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

(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.


118-192(2)
You are taken to have *acquired the *dwelling or your *ownership interest at the income time for its *market value at that time.

So now you are deemed to have acquire the property in 2010 at its market value then. So section 110-25(4) which allows holding costs such as rates, insurance and interest to increase the cost base can now apply but only to costs you have not otherwise claimed as a tax deduction. Regarding the $10k you spent on renovations at that time. It is a question of whether the $10k was spent before or after it was listed for rental. If spent before it was listed then the $10k should be reflect in the valuation anyway. If spent after it was listed the valuation should exclude the renos then add the $10k to the cost base.

Section 118-192 does not prevent you from continuing to cover the property with your main residence exemption for up to 6 years while it is rented out and indefinitely if it is not earning income under section 118-145. You have a choice which property you cover with your main residence exemption after you purchase the second one but note there will be 2 years (8-6) where you are not allowed to cover the first house with your main residence exemption so may as well cover your current house. In the couple of years you were renovating to sell, as it was not earning income you are entitled to go back and cover the original house with your main residence exemption again. I do want you to think about what CGT liability you are exposing your current house to.

So your CGT calculation on the original house starts from market value at 2010 and the cost base is only increased by costs incurred after that date that have not otherwise been claimed as a tax deduction.

You do realise I trust that choosing to cover the original house with your main residence exemption means your new house will be exposed to CGT.

The ATO is not going to allow you to amend back more than 2 years from the assessment notice for those years. Here is a link to the detail and a possible argument you could use to go back 4 years. https://bantacs.com.au/Jblog/amending-past-years-tax-returns/#more-141

Now to your calculations

  • Capital gain (capital proceeds – cost base): 650k – (300k + 18k + 40k + 10k) = 282k Regarding the $10k was it available for rent when you did the reno as the date it is listed for rent is the trigger point for the market value nothing from before that is included in the cost base but hopefully the valuation reflects it anyway. There are probably some legal costs of selling you can include here and as section 118-192 reset your acquisition date to 2010 so you can now use section 110-25(4) to increase the cost base by all the holding costs since it stopped earning rent in 2018 ie interest, rates, insurance, lawn mowing etc. Also need to reduce the cost base by any building depreciation you claim in your amendments. Note there should also be an adjustment for plant and equipment but everyone seems to ignore that.
  • Days owned since rented (between 2/8/2010 and 15/2/2021) = 3850
  • Days over 6 year limit (between 2/8/2016 and 4/1/2018) = 520 Good you picked up on the fact it could go back to your main residence exemption after it stopped earning income.
  • Assessable capital gain: 282k x (520 / 3850) = 38k
  • Net capital gain with 50% GST Discount = 38k/2 = 19k Probably less than this considering comments above. I think you should re work the figures to consider what it would cost you in tax if you chose to put your main residence exemption on your new property rather than the old one.

Calculating an income amendment for a typical year from 2010 onwards:

  • Rent: 800 x 12 = 9600
  • Expenses (rates, interest, insurance, repairs and maintenance, trees, floor tiles) = 4000 No property management fees?
  • Fixtures & fittings / building writeoff = 1000 (subject to quantity surveyors report) The building depreciation that you claim will need to reduce the cost base as now deemed to have been acquired after 13th May 1997 due to 118-192
  • Net income 9600 – (4000 + 1000) = 4600 MMM profit, just as well you can only go back 2 years. Not worth arguing for 4 years if it is a profit.
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