Reader question: I am 63 and my wife who is 61 wish to move into our investment property when I reach 65. I understand there would be no capital gains unless I sell the property. But we do wish to move into a newer home and sell this property eventually. Is there a grace period that we can live in the investment property and then sell it without having to pay capital gains tax, given that we will both be pensioners by then.
As you originally rented out this property (and assuming that you purchased it after 19 September 1985), you may be up for some capital gains tax (CGT) when you finally dispose of it despite living in the place for part of the time. You will get an exemption for any CGT for the period that you live in the property but you will have to pay CGT on your share for the period that it was rented out. Unfortunately, as you didn’t live in the place before renting out, you are 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 you move in to determine the growth of the property whilst it was an investment. In absence of any official valuation, you can pro-rata the capital gain made between the time that you rent the property out and the total length of time that you hold the property. As you would have owned the property for more than 12 months, you can reduce this amount by a further 50%.
Any taxable capital gain is added to your taxable income and taxed at marginal tax rates. The beauty about holding the property until retirement is that you will minimise any capital gain as you will have little investment and pension income so your taxable income will be relatively low. Also, by age 65 you will also be eligible for the Senior and Pensioners Tax Offset which effectively increases your tax free threshold beyond other taxpayers. For the 2012-13 year, senior Australians are not required to pay any income tax if their income is below $32,279 for singles (or $28,274 for couples).
This article first appeared in the June 2012 issue of Your Investment Property Magazine http://www.yipmag.com.au/. Copyright Key Media Pty Ltd 2012.