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I am going to buy a unit to renovate & sell within approx 3 years, I intend to let my daughter live in it after the renovation until I decide to sell. I was not intending to charge her any rent. When I sell,will the capital gain/loss be affected if no income is derived? I assume when I sell I can then use acquisition expenses, full cost of reno and selling costs, to calculate the gain/loss (hopefully gain). If I should charge rent, can I leave any income declaration until the tax year of disposal, and does this income need to be at market rates; but really do not want to collect rent from her.
Answer
Mary,
Your name is familiar to me but please don’t assume I remember all your circumstances from previous questions, I am dealing with this one just on the information you have provided in this question. I am assuming you have another property that you purchased after 19th September 1985 that you are already covering with your main residence exemption.
You are certainly allowed to increase your cost base (decrease the capital gain) by all those expenses in particular section 110-25(4) allows you to increase the cost base by all the costs associated with holding the property that you have not claimed a tax deduction for. If you are not earning rent you would not have claimed a tax deduction for any of the rates, interest, insurance, light globes, cleaning materials etc anything at all to do with the property. So these can be used to decrease your capital gain. It is just a matter of good record keeping.
CGT applies whether or not you charge your daughter rent but of course if you do you cannot include in the cost base the expenses that qualify as a tax deduction against the rent and if building depreciation applies you will have to decrease the cost base by this amount.
Whether you should charge your daughter rent or not depends on whether the net result will be a loss so you will get a tax advantage from the arrangement and whether you have enough income to benefit from that tax deduction. If it is going to make a loss for tax purposes then you must charge your daughter market rent or the ATO will treat the property as only breaking even, reference IT 2167. Market rent starts with what a real estate agent thinks you would get for it then you could reduce that by 10% because you will have a long term tenant, maybe a further reduction for putting up with renovations and 9% because you don’t have to employ a property manager.
The rent and associated expenses have to be included in your tax return for the year the rent is received.
Note if you bought the property in your daughter’s name she could cover it with her main residence exemption so no CGT would be payable. The first home owners’ concessions may also apply.
