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Brisbane(Enthusiast)Enthusiast
11 June 2024

Hello :)


I have been reading through various articles about changing my IP to PPOR, like this one:

https://community.ato.gov.au/s/question/a0J9s000000NW6AEAW/p00192373?referrer=a0N9s000000DacEEAS


They are of some use. But, I am finding it hard to get a few specific details and wondered if this wonderful forum could help.


We are currently living in our PPOR and have done since the day we purchased it, apart from a short period we used the 6 year rule to rent it out when we went overseas.

But now we are happy and back in Brisbane :)


In November 2023 we purchased another property. We were thinking we would rent it out in the interim and then eventually (next few years) build on it and move into it as our PPOR.


It had tenants in there when we purchased it and we just renewed another lease.


I am starting to think we should have ended their lease when we had the opportunity just to make use of the PPOR. GRRR.


So, down to my question:

We are now looking at accelerate the renovations on this property (an old Queenslander, not that is relevant here!) and start in January 2025 (when the current tenants leave).


My question is therefore about CGT, timing, and value.


This property, based on the advice with tenants etc. was to register it as a investment property. We did this.


When the tenants leave, I will register it as my PPOR, move in, and then start the renovations (while living in another property).


For any CGT in the future, I have three questions:


  1. Am I correct in understanding that I need to pro-rate the gain, with "duration/time" being the way I do that, even though most of the value upside will be when I renovate? So this will mean "some" gain while it is an investment property, then the rest while it is PPOR and therefore exempt. The IP gain will also therefore take some of the renovation upside...
  2. Can I therefore apply the 50% discount to the IP gain, since 12+ months would have passed.
  3. If I get a valuation by some local property agents to value the property as it transitions from an IP to PPOR, is this allowed? And then what if they said it has not moved in value (or even worse declined in value), as only 12 months of ownership would have passed, how would this be treated?

I am sure I might think of a few more things upon the response. Thanks for helping, it is greatly appreciated.

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Liked by Chinaby
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Most helpful response

Most helpful reply

michael298(Newbie)Newbie
11 June 2024

Hello, @Brisbane


I’m glad to hear you’re finding your way through the property landscape in Australia. Let’s address your questions regarding Capital Gains Tax (CGT) and the transition from an investment property (IP) to a primary place of residence (PPOR).


Pro-rating CGT: Yes, you are correct. If a property has been both your PPOR and an IP, you generally need to apportion the capital gain for the period it was used to produce income. The value increase due to renovations while it’s your PPOR may be exempt from CGT, but the portion of the gain while it was an IP would be subject to CGT.

50% CGT Discount: If you’ve owned the property for more than 12 months, you may be eligible for the 50% CGT discount on the portion of the gain that is subject to CGT. This discount applies to Australian residents and is calculated after you’ve applied any capital losses to your capital gains.

Property Valuation: Obtaining a valuation from local property agents as it transitions from an IP to a PPOR is allowed and can be a prudent step. The valuation would establish a market value at the time of the changeover, which could be used to calculate the capital gain or loss when you eventually sell the property. If the valuation indicates no increase or even a decline in value, this would impact the calculated capital gain or loss at the time of sale.

Remember, these are general guidelines, and individual circumstances can vary. It’s always best to consult with a tax professional or the Australian Taxation Office (ATO) for advice tailored to your specific situation. They can provide guidance on how to accurately report and calculate any potential CGT liability. If you have more questions or need further clarification, feel free to ask!



Best Regards

michael298

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Most helpful reply

michael298(Newbie)Newbie
11 June 2024

Hello, @Brisbane


I’m glad to hear you’re finding your way through the property landscape in Australia. Let’s address your questions regarding Capital Gains Tax (CGT) and the transition from an investment property (IP) to a primary place of residence (PPOR).


Pro-rating CGT: Yes, you are correct. If a property has been both your PPOR and an IP, you generally need to apportion the capital gain for the period it was used to produce income. The value increase due to renovations while it’s your PPOR may be exempt from CGT, but the portion of the gain while it was an IP would be subject to CGT.

50% CGT Discount: If you’ve owned the property for more than 12 months, you may be eligible for the 50% CGT discount on the portion of the gain that is subject to CGT. This discount applies to Australian residents and is calculated after you’ve applied any capital losses to your capital gains.

Property Valuation: Obtaining a valuation from local property agents as it transitions from an IP to a PPOR is allowed and can be a prudent step. The valuation would establish a market value at the time of the changeover, which could be used to calculate the capital gain or loss when you eventually sell the property. If the valuation indicates no increase or even a decline in value, this would impact the calculated capital gain or loss at the time of sale.

Remember, these are general guidelines, and individual circumstances can vary. It’s always best to consult with a tax professional or the Australian Taxation Office (ATO) for advice tailored to your specific situation. They can provide guidance on how to accurately report and calculate any potential CGT liability. If you have more questions or need further clarification, feel free to ask!



Best Regards

michael298

Liked by AriATO
Brisbane(Enthusiast)Enthusiast
9 Sept 2024

Hello everyone.

I hope all is well 💪😊


I am circling back on the above issue - changing IP to PPOR, then renovating, and officially how to treat CGT between the periods.


The one final step, before seeking official advice, is to post here - I think I have read every single article on this topic that ATO Community has!


A recap:


> Purchased as IP July 2023, rented since then and will be rented until December 2024 (18 months).

> We have decided the location is better for us to move into and call it our PPOR. We plan to do this December; live in it while renovating.


My question stems from how CGT is apportioned, and specifically, the renovations we undertake will increase value dramatically. This will be the period while it is our PPOR and nothing to do with the period it was rented. It will matter when we sell it in a few years - an almost certain outcome as we move for schools.


There are some articles here (including advice above) that potentially I can quarantine this increase, i.e., the very simple ATO assessment of the gain being linear from purchase to sale, apportioned by time only, might not be the only path.


I plan to get some massively specific advice on this when I find the right channel to do so, but also wanted to test on this thread. As said, there are other articles that state the ATO methodology - but do I have other options?


If the property is rented for 18 months as IP, then becomes PPOR and we live in it for 54 months (for ease of the calculation here), and renovate at some point through the 54 months...


That ATO seems to think the increase is linear and while the cost of renovation is deductible from the CGT calculation, the value increase as a result of this is due to the renovations - i.e., not inside the IP period. So, their view would be (simple terms): sale price less renovation costs less purchase price less holding fees/etc. = gain. This gain is then apportioned as 25% taxable under IP (with then a 50% reduction for owning more than 12 months), and then 75% not taxable due to it being PPOR.


So...

Is the above correct? And, do I have any options to seek a firm house valuation (or multiple/bank/agent) upon conversion from transfer from IP to PPOR to help show the value increase is minimal at that point?


I know hindsight is a wonderful thing and we should have just moved in, but at the time we didn't know where our lives were going! Sheesh.


Any specific advice is welcome. As said, I will be seeking more specific advice given the value increase and potential taxes due.


Thanks all - have a wonderful day/week.


Deb_ATO(Community Support)Community Support
19 Sept 2024

Hi @Brisbane


You've hit the nail on the head. Yes, you'll need specific advice and yes, we've got the place for you to get it.


Check out how to get in touch with our tailored technical assistance area.

They'll be able to take all the info you've given here and give you that tailored advice you need.

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Converting Investment Property (IP) to Principal Place of Residence (PPoR) | ATO Community