Convert an IP to PPOR then selling

Discussion in 'Investment Strategy' started by 5602, 8th Nov, 2009.

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  1. 5602

    5602 Member

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    Hi All,

    I know there are a few threads very close to what I'm about to ask but just slightly different enough to not answer my question:

    Supposing we have owned two IP's right next to each other for several years and never lived in them. We want to sell one or both of them but the capital gain (of both) is around $510K. The tax bill on this might come close to giving no benefit to selling. But we want to sell to reduce overall debt and keep other IP's. So my idea was to change my PPOR to one of these properties, combine the two properties under one title (which I believe may be possible???), rent out my current PPOR then after enough time has passed, sell the two IP's. Then go back to living in my original PPOR.

    So the questions -
    Considering they have been IP's for so long, would I be able to reduce or negate my CGT by changing my PPOR to one of these properties?

    How long does one have to occupy a property to prove it is their PPOR? 6 months isn't it?

    Is there something I'm not thinking of that could come back to bite me later by doing this?

    It's quite hard to sift through the info on the ATO about this!
    Any advice here would be welcome.

    Many thanks
     
    5602, 8th Nov, 2009
    #1
  2. Simon Hampel

    Simon Hampel Founder Staff Member

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    Unfortunately, you will still be liable to pay tax on the capital gain which accrued on the property up until you moved in. It is only CGT free for the period you are living in it.

    The other complication is that you can only have 1 PPOR, so while you live in the IP as your PPOR, your old PPOR starts accruing capital gains tax liability for the period you don't live in it.

    As for combining the two properties on one title, I'm not sure if that will achieve anything - indeed it may actually trigger a CGT event, which will see you need to pay the capital gains before you've even sold the place - which is the worst possible situation. You'd need to check on this.

    An example of how CGT works:

    1. you buy a property for $200K and rent it out
    2. several years later you move into it as your PPOR. You get it valued at this time (and you should!), and the valuer says it is worth $600K
    3. You live in it for a while and then then sell it for $850K

    Now, to calculate the CGT, you work out the cost base (which may be more or less than $200K depending on original purchase costs, depreciation claimed, etc), and then subtract that figure from the $600K valuation from the time it became your PPOR.

    Let's say the cost base was $210K, this leaves you with a net capital gain of $390K during the period it was an IP. The growth which occurred during the period you lived in the property is CGT free, so you can ignore the additional $250K of value up until when you sold it.

    Since you owned the place for more than 12 months, you will only pay tax on half this gain, so $195K will be added to your tax return (or split by whatever percentage of the property you personally own) for you to pay tax on.

    The longer you live in it, the more tax-free gains you will accumulate, but that doesn't diminish the liability for the capital gain earned while it was an IP. However, if you take inflation into account, the value of that capital gain will decrease over time - so the longer you leave it, the less you have to pay (in future dollar terms anyway!). Indeed if you never sell it, you never have to pay the CGT :D
     
    Simon Hampel, 8th Nov, 2009
    #2
  3. 5602

    5602 Member

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    Location:
    Sydney, NSW
    Thanks Sim for the fast response!

    Hmmm, some good info there. Ultimately something will have to be sold unfortunately so back to the drawing board it seems.

    Thanks again :)
     
    5602, 8th Nov, 2009
    #3