Re-establishing a rental as the Principal Place of Residence

[Izabarack]

Trying to plan the divestment of a rental (house A) and trying to sort out understanding of the capital gains formula. The situation is that I bought a house close to the workplace at the time, fully intending to sell again after about two years and return to living in the long term family home (house B), the Principal Place of Residence (PPR). As things happen, we lived there (house A) for 3 years then rented the place to a family member for the next 14 while we went back to the PPR (house B). Current understanding of the rules is that 14/17ths of the capital gain on house A is subject to taxation, if I sell tomorrow.

The current personal situation is that I want to turn one of the houses into a high end Motor home and travel Aust, two or three months at a time, for a couple of years. If I sell the current PPR (house B), no capital gain, simple. If I move back into the rental, can I re-establish that house as the PPR again and escape Capital Gains on the subsequent sale of that house? Or does the formula always stay as a ratio of time as family home: time as a rental. I have an appointment with the accountant but would like to get some ideas now.

Iza

[Bill M]

I was clearly told by my accountant that you can only have 1 PPOR at anytime. So at some point House B was not your PPOR (how could it be if you are claiming 3 years from house A) so then it won't be entirely capital gains tax free. That is the way I understand it anyway. Looking forward to hear what your accountant says anyway.

[Izabarack]

Ok, the answer is in. Once the six year limit is breached, the house sale is subject to Capital Gains, even if you move back in and it again becomes the principal place of residence (note the lack of capitals in the use of the term). Come sale time, the ratio of time owned to time rented is applied to 50% of the Capital Gain.

Looks like the best strategy will be to sell the PPR and move into the current rental while doing the travelling. The ratio will improve over the time we are travelling and make some small difference when (if) we sell later.

Iza

[skc]

Ok, the answer is in. Once the six year limit is breached, the house sale is subject to Capital Gains, even if you move back in and it again becomes the principal place of residence (note the lack of capitals in the use of the term). Come sale time, the ratio of time owned to time rented is applied to 50% of the Capital Gain.

Looks like the best strategy will be to sell the PPR and move into the current rental while doing the travelling. The ratio will improve over the time we are travelling and make some small difference when (if) we sell later.

Iza

Iza, did you find out if the CGT payable has to be based on the ratio of rented vs PPR, or can it be determined based on the gain in value over the rented period?

Say house price doubled for the 5 years (between 1997 and 2003) you lived in it as your PPR, but stayed flat for 10 years (2003 to 2012) when you rented it out, can you calculate CGT based on the market price at 2003?

[Izabarack]

Iza, did you find out if the CGT payable has to be based on the ratio of rented vs PPR, or can it be determined based on the gain in value over the rented period?

Yes, the CGT is calculated on the value increase during the rented period. If I sold tomorrow, before or without moving back in, the gain in value since it was first rented and now, is the figure. If I do decide to move back in, I need to note, and get some evidence, as to the value as at the date it was no longer rented. The CGT event is only triggered when the the house is sold. The date of the sale contract is also important to locate the CGT event in a Financial Year. The date the contract is signed is the important date and settlement date is not important. I am currently going through the exercise to work out what the value was at the time the house was first rented out. I missed this out originally because at the time I thought the house would be sold long before the six year rule was passed.

Iza

[skc]

Yes, the CGT is calculated on the value increase during the rented period. If I sold tomorrow, before or without moving back in, the gain in value since it was first rented and now, is the figure. If I do decide to move back in, I need to note, and get some evidence, as to the value as at the date it was no longer rented. The CGT event is only triggered when the the house is sold. The date of the sale contract is also important to locate the CGT event in a Financial Year. The date the contract is signed is the important date and settlement date is not important. I am currently going through the exercise to work out what the value was at the time the house was first rented out. I missed this out originally because at the time I thought the house would be sold long before the six year rule was passed.

Iza

Thanks for the reply. Looks like the CGT can vary by a fair bit depending on which valuer you pick!