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Capital gains tax advice please

Discussion in 'Accounting, Tax & Legal' started by Confused CGT, 30th Nov, 2010.

  1. Confused CGT

    Confused CGT New Member

    Joined:
    30th Nov, 2010
    Posts:
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    Location:
    Perth, WA
    Hi all, I'm new to this forum and I was after some advice regarding capital gains tax. My Wife and I have 2 properties both are 50/50 in our names. She doesn't work as we have 2 young kids. our 1st property we lived in for 4 years before renting it out, moved interstate and about 8 months later bought our second house which we have been living in for 2 years. We are being harrassed by a developer to sell out first house as he has bought all the houses around us. Is our first house subject to CGT? It has risen in valve quite a bit more than the 2nd house. I was under the impression that our 1st house would not be subject to CGT unless we rented it out for more than 6 years. If I could have the choice I would pay the CGT on house 2 as it's valve has increased by about 10% in 2 years where house 1 has increased about 110% since we bought it. Any advice would be great, Thanks. :)
     
  2. Rod_WA

    Rod_WA Well-Known Member

    Joined:
    18th May, 2007
    Posts:
    324
    Location:
    Inglewood, WA
    Accountant required for this one... but in brief, the first house is likely to be subject to CGT for the time it has been rented. I guess from what you've written that you didn't have a valuation done on the property prior to renting it?
    The best place to start is the ATO website, where this is taken from:

    Go to Australian Taxation Office Homepage and follow 'Individuals' tab, 'Your Situation' > 'Investments and Superannuation' > 'Rental Properties'.

    There's a lot to digest there but it will answer many questions... essentially the news is not likely to be that good!
     
  3. Rob G.

    Rob G. Well-Known Member

    Joined:
    6th Jun, 2007
    Posts:
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    Location:
    Melbourne, VIC
    You only get one exempt main residence at any time.

    If you immediately moved into house #1 and used it entirely as your main residence initially then you can elect to treat it as continuing to be your main residence for up to 6 years while absent and renting it. You cannot exempt house #2 during this time.

    The election is made when you file the tax return for the year you sell house #1.

    Therefore you have the potential to sell house #1 CGT exempt from the facts you posted.

    But you need to get your details checked by an accountant. Complicating factors would be if you did not move in immediately, or claimed part of your home as a place of business etc.

    Cheers,

    Rob
     
  4. tax guy

    tax guy Member

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    9th Dec, 2010
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    Location:
    Sydnye, NSW
    Rob G is correct in that you can only have one PPR at a time. However as you have moved into your second home this will be your current PPR. You cannot use the 6 year rule in this instance and choose property 1 as this ceases the time you moved into property 2.

    You can get a valuation on property 1 at the time you left this property, this will be the cost base of the property for CGT purposes. You will pay CGT on the difference on what you receive and the market valuation at the time you left.
     
  5. Rob G.

    Rob G. Well-Known Member

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    6th Jun, 2007
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    Location:
    Melbourne, VIC
    Until you make the election, the exemption applies to the house actually being used as your main residence.

    You are able to elect to apply the exemption to the first property when you sell it and file your tax return for that year.

    This means your current house will not be eligible for the exemption for the overlap period.

    Get some specific taxation advice before you act to check all details.

    Cheers,

    Rob
     
  6. Confused CGT

    Confused CGT New Member

    Joined:
    30th Nov, 2010
    Posts:
    2
    Location:
    Perth, WA
    Thanks for your input everyone. I've had some conflicting advice recently and what people are saying on this forum was my previous understanding. I will get some professional advice in the coming months as property 1 may be getting sold. Thanks again.