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Q: I have lived in my principal place of residence in Sydney since 2009 (I own it 100%). My husband and I bought an investment property in Sydney in 2015 (planning to live in this when my parents moved to Australia). We have rented the investment out for the past two years and generated income, and we own 50% each. We are moving into the investment shortly, after painting and making a few repairs.
My parents, who are not Australian citizens but have valid working visas, have now moved to Australia from the UK and are going to live in our old PPOR (bought in 2009).
1. Do we need to get a valuation for the CGT for last two years (before we paint/improve the value)?
2. Can our old PPOR bought in 2009 be classified
as a holiday home if my parents live there, so we don’t incur CGT when sold? I would be happy to sell this to my parents, but can’t as they are classified as foreign investors and will be hit with about 8% stamp duty and a foreign investor fee!
- Thanks, Lynsey
A: A valuation on a property is only required when you are renting out a main residence for the first time. At that time the valuation of a previous main residence will become the cost base for capital gains tax purposes.
Your investment property (purchased in 2015) will always be subject to capital gains on a pro rata basis as it was never established as a main residence in the first instance when acquired.
"You can continue to claim the old PPOR as a main residence for up to six years after you move out"
Therefore, in this case no valuation will be necessary.
All costs that you incur on improving the property and any repairs not claimed as rental property deductions, as well as holding costs while living in the property, will be added to the original cost base when calculating the overall capital gain on sale of the property.
Meanwhile, in regard to your original PPOR, classifying it as a holiday home will not remove the obligation to pay CGT.
However, you can continue to claim the old PPOR as a main residence for up to six years after you move out if it is used to produce income, and indefinitely if it is not used to produce income. I’m not sure if your parents will be paying you rent (in which case the property will be producing an income).
Note that if you choose to maintain this as a main residence you cannot claim another property as a main residence at the same time. This means you will either nominate your original PPOR (purchased 2009) or your new PPOR (purchased 2015) to receive the main residence exemption. You will only need to make this choice when you prepare a tax return for the year in which either of the properties is first sold.
If you did acquire another property as your main residence, one of the properties would have been exposed to capital gains tax. In situations like this, you need to speak to your accountant in order to investigate the options available to you and develop strategies that you can adopt when dealing with actual and potential tax liabilities.
Need to know
- A valuation is only required the ﬁ rst time a main residence is leased out.
- The cost of upgrading a property is added to the cost base when you sell.
- Only one property at a time can be claimed as a main residence.
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Chan & Naylor Perth
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