Supplementary Question to #586

Question

Hello again Julia

You gave me a very comprehensive answer to my question #586 (27 July 14). I hope this supplementary question does not require as much of your time.

I have now moved to my former holiday home and notified change of address. The planning application for subdivision of my pre-1985 city home block is underway.

I have purchased, but am yet to settle, another beachside home. I plan to move from the "old" holiday home into the newly purchased one, and put the old one on the market after doing a tidy up.

Further reading of your booklets turned up Section 118-192.

The new information for you is that prior to moving there, I rented it out for periods and received payment. (Incidentally, my father bought the holiday home in 1994, so it is not pre-1985.)

Question: Does that rental activity enable me to reset the cost base either to the value when it was rented, or to the value when I moved there as my PPR, rather than the value when I inherited it from my deceased parents in 2002?

Kind regards

Claire

Answer

Unfortunately, section 118-192 only works in one direction, that is the change from being fully covered by your main residence exemption to being a rental property. By fully covered I mean had been your main residence during all the time you owned it up to the point you rented it out.
I am now very concerned about the huge amount of CGT you are going to have on the old beach house. It would be worth crunching the numbers to see whether it is worth keeping it and earning rent off it, as the return maybe better than what you can get with the remaining money after paying CGT. If you and your heirs never sell they will never have to pay CGT, no matter how valuable this property becomes. CGT is really a tax on inflation so slowly you lose your assets in tax.
There is a window of hope if your parents were living there at the time they died or if at any time during their ownership it was covered by their main residence exemption.
The cost base will start with what your parents paid for it in 1994 and then you need to try and calculate their holding costs. The ATO has been known to be pretty reasonable in this regard. Then there are your holding costs, section 110-25(4) as I mentioned in my last answer, don’t ignore a thing right down to the lawn mower fuel.