Our tax experts are on hand to answer any tax queries you may have regarding your property investments and wealth creation strategies.
Email your taxing questions to editor@yipmag.com.au.
CGT ON RENTAL PROPERTY TURNED OWNER-OCCUPIED
Q: Due to the escalating price of real estate in Sydney, my partner and I purchased a property prior to when we originally intended and are now renting it out until we get married in two years’ time. I would like to enquire about the situation regarding CGT (capital gains tax) if we move in after the two years and sell it possibly 10 years down the track at a profit. What percentage of CGT would be payable? We are currently living at home with parents and will not be purchasing any other property. I would appreciate any advice you could give.
A: In this case, because you and your partner have used this property for income producing purposes from when you initially purchased the property, you will be subject to a partial capital gains tax liability if you sell the property for a profit in the future. Assuming the property is held in your individual names (that is, it is not held in a company or a trust), if the initial income producing period is two years and then after you get married you and your partner move into this property as your principal place of residence for eight years, then this is a total period of ownership of 10 years.
For capital gains tax purposes, the capital gains tax liability only applies to the period when you used the property for income producing purposes which was for 20% of the total ownership period.
Therefore, if for example the total profit of the property is $300,000 when you sell in 10 years’ time, the taxable component is $60,000 (being $300,000 at 20%). As you and your partner would have held the property for more than 12 months, then this will entitle you to the 50% CGT concession which will reduce the taxable component to $30,000.
Assuming the property is owned in joint names in equal shares then you and your partner will be assessed for capital gains tax purposes individually at $15,000 each and the tax rates that will be applied will be at your respective individual marginal tax rates.
– Angelo Panagopoulos
CLAIMING BANK CHARGES ON RENTAL PROPERTY
Q: I have had a rental property for the last seven years and decided to get out of the fixed loan and change the loan to another bank. The bank charged us an exit fee of $18,000. As the loan is for a rental property, can we claim the $18,000 as it is still for the same rental property? Hope you can help me with this enquiry.
A: When you are refinancing a loan, you are effectively ending one loan and commencing a new loan. In your case, there was already an existing loan for the purpose of funding your investment property for income producing purposes.
Assuming also that the original loan did not have any private and/or non-deductible portion of the interest expense (you can have an investment loan and still have a part of the loan where it is either private and/or non-deductible for tax purposes. For example, you may have used an existing investment loan and increased the borrowings to purchase your principal place of residence or for an overseas holiday. In both cases the portion of the loan for these purposes cannot be tax deductible for the interest expense), the exit fees for breaking the original loan being $18,000 are tax deductible.
– Shukri Barbara
TURNING RESIDENCE TO RENTAL
Q: I’m planning to move to another house, after 15 years in the present one. However, I don’t want to sell it, I want to rent this house out for the next three to four years. What will be my capital gains tax? How will the capital gains tax be calculated? Will I have to pay for the entire increase in value over the last 15 years?
On first being acquired, a property can be established as either a main residence or a rental investment. The nature of first usage of the property will dictate how the capital gains tax is calculated on sale at a profit. Whenever a property is occupied as a main residence, it will be exempt from capital gains tax for that period of time. The legislation allows only one main residence for each single person or a family. Where a property is first established as a main residence on acquisition and later rented out, it can be exempt from CGT if sold within the next six years from the date it was first rented. But only if no other property is nominated as a main residence. Examples of this is where people are located to other states or overseas.
If another property is nominated as the main residence, then any gain on sale of the first property will be subject to CGT. Examples include where people move to a new property and rent out the old property after receiving an inheritance or having paid out the loan, or kids have grown up and need somewhere larger to live. In its simplest form CGT is basically calculated as the difference between the net selling price and the cost base. The cost base will be the market value of the property when it changed its character from main residence to rental property. So any growth while it was a main residence is not taxed.
By contrast, where a property is first established as a rental investment, and then changes its character to a main residence, its cost base will include the original purchase price, stamp duty, legal fees, building inspection fees, etc. CG will be calculated as the difference between the net selling price and the original cost incurred. The taxable portion of capital gains will then be apportioned on the basis of time occupied as a rental and time occupied as a main residence.
– Shukri Barbara
The tax experts:-
- Shukri Barbara is a CPA, CTA and principal advisor at Property Tax Specialists, with over 30 years’ experience in public practice, specialising in property tax, ownership structures, asset protection, (legally) minimising tax, and cash flow analysis
- Angelo Panagopoulos is principal at Hamilton Reid Chartered Accountants, specialising in property and taxation, asset protection and ownership structures.
