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CGT after moving into investment property

Dec 14, 2012

Reader question: We purchased a house with our son 8 years ago. We rented it out for 4 years and then my son moved in but we (my husband and I) continued to receive rent from some of the bedrooms my son rented out to cover our mortgage.  We have now sold our 50% share to our daughter-in-law so now my son and his wife own the house and are living in it.  They plan to live there for quite a few years and renovate it.  How does Capital Gains affect him once he sells it (maybe in 10 years)?

What great parents you are by giving your son a helping hand into the property market.  My old man helped me out with my first property when I was 19 and I was forever grateful to him for the best investment decision that I have ever made. 

There are two separate ownership interests here which we must consider for Capital Gains Tax (CGT) purposes – your son’s 50% share and your daughter-in-law’s half interest.  As the interests were acquired at different times and  circumstances, the CGT consequences are not the same for both.

Assuming that they continue to live in the property til disposal, there will be no CGT applicable for your daughter-in-law’s share as it would be treated as her principal place of residence since acquisition. 

However, as your son originally rented out the property he may be up for some CGT despite him living in it for the majority of the time. Like, your daughter-in-law he will get exemption for any CGT for the period that he lives in the house but has to pay CGT on his 50% share for the first four years of that it was rented out.  Unfortunately, as he didn’t live in the house before renting out, he is excluded from the 6 year Principal Place of Residence exemption which could have avoided CGT altogether.

The simplest calculation of the capital gain would be to use an official valuation (by a registered valuer) at the time that he moved in four years ago to determine the growth of the property whilst it was an investment. 

In absence of any official valuation, he can pro-rata the capital gain made between the time that he rented the property out (4 years) and the total length of time that he holds the property.  If they sell in say ten years from now, the taxable capital gain that would be is 4 /18ths of the net capital gain made after factoring in purchase and sale costs.  As he has owned the property for more than 12 months, he can reduce this amount by 50%.

 

This article first appeared in the November 2011 issue of Your Investment Property Magazine www.yourinvestmentpropertymag.com.au. Copyright Key Media Pty Ltd 2011.



 

Tags: CGTChildrenFamilyPersonal taxProperty

Author: Mr Taxman

Comments

"The links and resources posted by you in the blog are very useful for me! I was looking for this exact and particular i nformation for a long time. Thanks"

By: Student Accommodation Investment on Oct 21, 2014 1:13PM

"In this situation my understanding is that because the property was first used as a rental property, and then became the person’s residence, the days of ownership method must be used to work out the CGT payable - not a valuation as you have suggested. Is this correct?"

By: Allan Travers on Jan 13, 2015 6:50AM

"Have a rental property for 12 years..thinking of demolishing and build a new property, live in for 1 year then rent for under 5 years and then sell.While property is rented I will be leaving in another place(rent or buy but not claiming as my residence).How CGT works and can expenses(interest etc) be claimed. Thanks Chris"

By: Chris on Jan 17, 2015 1:31AM

"My principal residence is a duplex. My husband has dementia - we rent a house out and would like to move in, so there is room for a carer. How will this affect our capital gain and Aged Pension. Should we rent or sell duplex. We have $210K Mort. on rental prop. Should I transfer this to duplex if I rent out We have no super. Joan"

By: Joan McAteer on Aug 02, 2015 12:50AM

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