Using Your Dwelling to Produce Income

Question

Our property was purchased 15th Feb 1996 and lived in as principal place of residence (PPR). Purchase price $173,750, plus costs. I relocated due to work transfer 7th July 1997, property available for rental as at 8th July 1997.  Property value as at 7th July 1997 say $300,000.

 

On basis that property is PPR and available for rent during the next six years, and the value of the property at the end of the six years (7 July 2003) is valued at $950,000. Note: Property has not sold, but may be sold sometime in the future. Assuming the property is sold for $1,000,000 today, what is the Capital Gain liability: $700,000 or $50,000?  (excluding discounts etc).

 

Does the owner use the valuation of 7 July 2003 as the basis for CGT calculations upon the sale of the property, instead of ‘The amount of the gain is subject to tax calculated by multiplying the gain realised since e.g. 8th July 1997 by the proportion of days that the property was not considered to be PPR prorated?”  

 

Please note property today would have a value of less than $950,000, therefore if the owner was able to use the valuation method, a CGT loss would be incurred.   

Thanks, Paul

Answer

If you start using part or all your main residence to produce income for the first time after 20 August 1996 a special rule applies to calculate your capital gain or capital loss.

In this case, you are taken to have acquired the dwelling at its market value at the time you first used it to produce income if all the following apply:

• you acquired the dwelling on or after 20 September 1985,
• you first used the dwelling to produce income after 20 August 1996,
• when a CGT event happens to the dwelling, you would get only a partial exemption, because you used the dwelling to produce assessable income during the period you owned it, and
• you would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before you first used it to produce income.

If all the above apply, you must work out your capital gain or capital loss using the market value of the dwelling at the time you first used it to produce income. You do not have a choice.

Summary

1. The property was purchased 15 February 1996 and used as the main residence until 7 July 1997.
2. The property commenced being used for rental 8 July 1997 until now.
   1997. Required – valuation as at 7 July 1997.
3. Therefore, the property will be caught under the rules for using your main residence to produce income after 20 August 1996 i.e. commenced 8 July 1997.
4. The total Capital Gain will be the Capital Proceeds Less Cost Base (using above) adjusted by non-resident days’ proportion to total ownership days to determine the taxable gain.
5. Capital proceeds equals the net selling price i.e. $950k.
6. Cost base equals the valuation when you moved out i.e. 7 July 1997 plus any selling costs i.e. $300k plus selling costs
7. Non-resident portion equals the days from commencement of the rental period plus six years to the sale date and the period of total ownership days is the days from the day of moving out to the sale date.
8. As the property was owned for more than 12 months from the date it was first used for rental until the sale, the 50% CGT General Discount would apply.