Q: In September 1998, my husband and I purchased a three bedroom townhouse in Werribee for $95,000. In July 2004, we moved out of this home and into our new residence, but we retained the property as an investment. At the same time we refinanced the mortgage, bringing it up to $144,000. If we were to sell this property now, how would the capital gains tax be worked out? Would it apply against the $144,000 that we re-mortgaged the property to, or the original cost of $95,000?
A: Profit would be calculated on net selling price, after agent's fees and related expenses, less your costs, which includes the purchase price plus other buying costs such as stamp duty. It would not be calculated on the refinanced amount.
There are two possible scenarios.
If you moved out of this property into another PPOR (principal place of residence), then the tax on the sale of the property will be calculated as of the market value of the property on the day that you moved out.
You left in July 2004, so capital gains tax will be applied against the difference between the value of the property when you moved out - as determined by a registered valuer - and the net sale price.
So, for example, if the property was valued at $200,000 in July 2004, and your net sale price was $300,000, you would be liable to pay capital gains tax on the $100,000 difference.
However, if you moved out into rental premises and not another owner occupied home, then there is a provision you can take advantage of. This allows you to identify the property as your PPOR for up to six years after you move out. As such, given the sale was within that time period, then no capital gains tax would generally apply.
From what you have advised, I would say you fall into scenario one, but it is worth getting professional advice on this.
Also, because the asset was held for more than 12 months, any capital gains tax would be reduced by the 50% general discount.
Ken Raiss is the director of Chan & Naylor, an accountancy firm that specialises in the areas of Asset Protection, Wealth Creation through property investing, Estate Planning and Tax Planning. The company ranks in the top BRW 100 Accountancy firms in Australia. Phone 02 9391 5400 or visit www.chan-naylor.com.au
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