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Renovations on an investment property turned primary residence

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Hi all,
We currently own an investment property purchased 4 years ago that has always been rented out to tenants.
Our current tenants will vacate at the end of the year after which we plan to undertake significant renovations (approx 1 mil worth of renovation) and then move into the property as our primary residence.

Question is how to calculate capital gains when we sell the property in the future.
Do we:
1. Get an independent valuation done before renovations. So we can clearly say how much the property has appreciated whilst it’s been an investment property, and this portion will be taxed. Then the difference between the valuation and future sale price is exempt from CGT because it is our primary residence?
Or,
2. We incorporate the cost of renovations into the cost base when we sell in the future. So the capital gains is the sale price minus the sum of the purchase price and cost of renovations. Then apply some proportion to the capital gain depending on how much of the time it was an investment property.

Thank you for any help in answering the question!
1 ACCEPTED SOLUTION

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ATO Certified

Community Manager

Replies 0

Hi @Lisa1803,

 

Thanks for your patience.

 

Option 2 is the correct approach. The  cost base or a rental property includes the amount you paid for it and the cost of any improvements  See the second example at cost base of real property.

 

When you sell your property that you have lived in for a period of time you will be entitled to a CGT main residence exemption for  your-main-residence to some extent. See: calculating-a-partial-exemption---main-residence.

 

Thanks

 

KylieS

2 REPLIES 2
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Community Manager

Replies 1

Hi @Lisa1803,

 

Will look into this one for you.

 

Thanks

 

KylieS

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Best answer

ATO Certified

Community Manager

Replies 0

Hi @Lisa1803,

 

Thanks for your patience.

 

Option 2 is the correct approach. The  cost base or a rental property includes the amount you paid for it and the cost of any improvements  See the second example at cost base of real property.

 

When you sell your property that you have lived in for a period of time you will be entitled to a CGT main residence exemption for  your-main-residence to some extent. See: calculating-a-partial-exemption---main-residence.

 

Thanks

 

KylieS