For this month, our tax experts reply to questions regarding CGT and tax on inherited land. Email your taxing questions to firstname.lastname@example.org
Q I have a PPOR that I purchased then lived in for two years, then rented it out for a year. After this, I moved back to live in it for a further year. I’ve just decided to rent it out again for a further three years.
How does the CGT exemption rule apply here? When does the six-year term start and finish? Does it reset when I move back in?
On first being purchased, a property can be established as either a main residence (MR) or a rental investment (RI). The nature of first usage of the property will dictate how the CG is calculated on sale at a profit.
Whenever a property is occupied as an MR, it will be exempt from capital gains tax (CGT) for that period of time.
Under the six-year rule, a property can continue to be exempt from CGT if sold within six years of first being rented out. The exemption is only available where no other property is nominated as the main residence.
When the dwelling is re-occupied as the main residence, the six-year exemption resets. So another six years of exemption is available from the date it next becomes income producing. The example above shows three years where the dwelling was producing rental income since being reoccupied as an MR. As this is less than six years, then any gain on sale will be exempt from CGT.
Where a property has great capital growth potential and the personal circumstances allow it, then extending the exemption by re-occupying the property as an MR at regular intervals may result in a tax-free gain on sale where all the other conditions are met.
Limitations apply where the property was first rented out before 21/8/1996. Assumption was made that house was acquired/rented after that date.
– Shukri Barbara
Q In August 2012 I had two units on one title transferred out of my parents’ name into mine (payments of tax etc sorted by accountants). I am using both properties as my PPOR with both units never let out or rental income collected as my son lives in it with utilities etc in my name. I am in the process of subdividing the properties onto two separate titles and selling both units separately and I wondered whether I will be subject to CGT on the sale of one unit?
Ultimately, you are only entitled to nominate one property as your main residence at any given point in time. By nominating one property as your main residence, and providing this property has never been used for income producing purposes, you will be entitled to the full CGT main residence exemption.
When you subdivide your current properties into two separate titles, this will effectively create two separate assets for CGT purposes. When you sell both properties, you will trigger a CGT event for one of the properties (the property that is not your nominated principal place of residence) for which you may incur a CGT liability for the sale of this property.
– Angelo Panagopoulos
CGT ON IP TURNED PPOR
Q I bought an investment property in 1997 and have rented it out since then. (The house is in my name only.) Next year I expect to demolish it and build a new house.
Firstly, if I move into it to live there, and after 10 years I sell the property, do I still have to pay capital gains tax? If so, how is the capital gains tax calculated?
Secondly, if I pass away, and my daughters as a result own it, and they sell the property, do they still have to pay capital gains tax?
When you demolish your investment property and build a new house, you are effectively scrapping one asset (the existing dwelling) and creating a new asset (the new dwelling). The new dwelling will have a new cost base (cost of construction of the new dwelling plus additional costs which relate to the construction of the new dwelling).
If you intend to nominate the new dwelling as your principal place of residence and sell after 10 years, this will trigger a CGT event and you may be liable to pay CGT on a proportional basis. The basis of the calculation will be proportioned to the increase in the market value of the land between the time of acquisition to the time of sale, and then, the 10 years that you would have been living in the new dwelling will be exempt from CGT; however, the preceding years (from 1997 to the time the property ceased to be an investment property) will be liable for CGT. Whilst the land in itself will give rise to a proportional CGT liability, the actual new house, however, will be CGT exempt because it was used as your main residence from the outset, post construction.
The CGT and tax outcome will be the same in the event that you pass away and your daughters inherit the property (and subsequently sell it afterwards) because it was an asset acquired after 21 September 1985; your daughters will also inherit the same cost base and acquisition dates from when you acquired the property in 1997. (Please note, there is no CGT or stamp duty applicable when your daughters inherit the property from you; however, if your daughters subsequently sell the property afterwards, then this will trigger a CGT event.)
Also, depending on the age of your current investment property (and also how it was used prior to you purchasing the property in 1997), it may be worthwhile to engage the services of a quantity surveyor to prepare a scrapping schedule for you prior to the house being demolished. Properly applied, scrapping may be available to you as an income tax deduction.
– Angelo Panagopoulos
TAX ON INHERITED LAND
Q I inherited eight acres of vacant land from my mother. If I sell it for $140,000 do I have to pay capital gains tax? The land is in Queensland. I don’t own any other properties and currently live in a rental. My mother owned the land for 40 years and she died in 2012. I’ve owned the land since August 2013 and had to pay rates on it. What are my CGT obligations if I want to sell it?
Generally, with property there are no tax impacts until a disposal/sale happens and a ‘CGT event’ occurs.
Capital gains are calculated as the difference between the sale price and the cost base. The cost base includes the purchase price, stamp duty, legal fees, pest and building inspections. Cost base also includes the cost of repairs immediately after acquisition. Any capital renovations are also considered part of the cost base. For non-productive land the cost base also includes rates and taxes paid.
With inherited real estate, one of the first considerations is the date when the property/land was first acquired by the deceased. If acquired before 19 September 1985, then the cost base for the beneficiaries will be the market value on the date of death. This is the case here. The market value can be determined by having a valuation carried out, preferably by a qualified valuer.
Where disposal is made within two years of date of decease, there will be no CGT impacts. So the proceeds are obtained free of tax by the beneficiaries. The two-year period is to allow for probate and other legal issues to process.
Where a disposal is made after the two years from the date of decease, CGT is calculated as described above.
Capital gains is considered income and is added to your tax return. So the rate applicable to it depends on your other income and the marginal tax rate it pushes you into. Depending on your personal circumstances this may be negligible.
The comments above are of a general nature only and not to be acted upon without advice from your property tax specialist.
– Shukri Barbara
This feature is from Your Investment Property's August Issue. To read more, you may purchase the issue or sign up for a subscription.
Do you have more than $200k in your super fund? You could use your super to buy property - Find out how