19/04/2012
Question: My wife and I bought an investment property in Sydney three years ago, which we are currently negatively gearing. We are renting our PPOR while we save a cash deposit for our own home: being Sydney, this is taking longer than we expected. We are seriously considering moving into our investment property in order to cut our spending and improve our short-term savings. We have been advised to get a property valuation on the day we move in, so that we can accurately determine our CGT liability (in case we ever sell it in the future). What would happen if we moved into the investment property and lived there for 3-5 years (while paying down a chunk off the mortgage)? Under current tax law, could we then turn it back into an investment property after we've moved out and we've bought a new PPOR? How is CGT determined if we ever sell it down the track?
Answer: I understand that you currently own an investment property and you are currently residing in leased premises (which you have referred to as your PPOR).
Should you move into the investment property, the property at this point may be (and probably will be) for tax purposes be treated as your principal place of residence.
The recommendation to get a valuation is prudent as it will crystallise the market value of the investment property at the date when it converted to a PPOR for tax purposes.
It is important to address the notion of the ‘six year absence rule’. This rule enables one to move out of their principal place of residence and lease that property as an investment property for up to six years and potentially the capital gains exemption of the property will be maintained (this assumes that no other property is claimed as a PPOR).
Therefore, in this case, a capital gain may potentially apply from the time the investment property was purchased to the time it became the main residence. While the property is the main residence and for a period of six years after it has converted back to an investment property the capital gains may be negated (I emphasize this assumes that no other property is claimed as a PPOR).
One should note that if you were to buy the new principal place of residence, it is important to establish which of the two properties will continue to have the PPOR status (this decision in practice is not easy as it requires a prediction as to the future capital growth of each property). As it is only possible to have one principal place of residence at a time, this is an important consideration.
- Answer provided by Dom Cosentino, Kennedy & Co Chartered Accountants (www.kennedy.com.au)
