Capital Gains tAX

[Monaro Gundapa]

What's the deal with Capital Gains Tax. I bought my only house,while living at home with my parents and rented it out cheap . I hear if i sell it, i will be hit with paying over $50 000, making me in debt buying another house to live in it now that's in a cheaper location when i paid for my house when it was cheap.

The house that i bought like every house in the Country goes up every year,why are they ripping me off. Is it possible to sell my house to a friend/cousin or whoever i can trust for less then what i paid for it,like $500 and let them live there for a while for free not paying anything,then buy it back, if they don't keep it and live in it for a short time and sell it to buy me a place for myself and that way they don't get my money and i still have a house.

 

[bunsen burner]

What's the deal with Capital Gains Tax. I bought my only house,while living at home with my parents and rented it out cheap . I hear if i sell it, i will be hit with paying over $50 000, making me in debt buying another house to live in it now that's in a cheaper location when i paid for my house when it was cheap.

The house that i bought like every house in the Country goes up every year,why are they ripping me off. Is it possible to sell my house to a friend/cousin or whoever i can trust for less then what i paid for it,like $500 and let them live there for a while for free not paying anything,then buy it back, if they don't keep it and live in it for a short time and sell it to buy me a place for myself and that way they don't get my money and i still have a house.

Interesting. Couple of preliminary points:

1. You need better grammar. Everyone makes speling istakes and typos, but it's hard to read what you're saying.
2. You should really understand this stuff already. At east you're making an effort to work it out now. Make sure you have the right information before you sell (CGT laws, likely sale value, selling costs, etc)
3. Huses in the country do not go up every year. You may be lucky and yours has.
4. If you're paying $ 50,000 CGT then you've made a lot of money. Judging by your grammar and understaning of RE, I can only assume you are not smart enough to do this!
5. Never sell under value to someone else no matter hw much you trust them.

CGT

Profit is regarded as income. If you own the place for over a year you get a 50% discount.

example:

You buy a place for $100k (inc costs and stamp etc), you sell it for $200k and it costs you $8k selling costs. $208k-100k = 108k

If you have owned it for over a year, you are taxed at your marginal tax rate (you just add this onto your income) on $54k, if you have owned it for less than a year you pay tax on $108k.

If you have lived in it for any amount of time they pro rata it.

example:

You lived in that house for 6 months and you sold it 2 years after buying. That represents 25% living, 75% renting. You then pay CGT on 75%.

$108k x 50% CGT discount = $54k

$54k x 75% investment property time = about $40k

So if you wage is $40k, you will have to pay tax on $80k. So the first $35k of your CG will be taxed at 30c and remaining $5k at 40c.


Show me your figures (buy price and buying cost, estimated selling price and selling costs, and outstanding loan) and I will show you what you're up for.

Also, go here:

http://www.ato.gov.au

It's a very easy website to navigate and easy to understand. It's in layman talk rather than lawyer talk.

disclaimer: do you're wn research on the ATO website. What I've told you is off the top of my head and maybe be slightly incorrect. But it works closely to how I said. You will not lose money - if you sell for more than you buy (inc all costs), then you can't lose money.

 

[southcoast]

What's the deal with Capital Gains Tax.

It is a tax levied by the govt whenever someone makes a profit on the sale of an asset - you only pay CGT if you make a profit.

I bought my only house,while living at home with my parents and rented it out cheap .

Correct - the house was never your principle place of residence and as such will be subject to CGT. If you had lived in it and established it as you home and then moved out for up to six years it could have been CGT free.

If you owned the property for more than 12 months you will be eligible for a 50% discount on your capital gains. Note the 12 months is not calculated from date of purchase to date of sale - rather the dates contracts are signed also factor in the equation.

Why did you rent it out cheaply - if your tenants are not paying market rent the ATO may question the validity of your business decisions.

You really needed to seek proper advice before making any decisions.

I hear if i sell it, i will be hit with paying over $50 000, making me in debt buying another house to live in it now that's in a cheaper location when i paid for my house when it was cheap.

How can you be in debt? The $50K comes off your profit. At worst you will still have at least $50K in your pocket.

Your dilemma is one reason why buy and hold approach is so successful under normal circumstances. CGT, selling and buying costs do erode profits.

The house that i bought like every house in the Country goes up every year,why are they ripping me off.

They are not ripping you off - it is part of tax law and is applied to all Australians who make a profit. Some of us use good advise to minimise the impact of such taxes.

Is it possible to sell my house to a friend/cousin or whoever i can trust for less then what i paid for it,like $500

All decisions must be based on an 'arms length' - in otherwords they must be seen to be 'normal'. Abnormal decisions (lower than market rate rent, lower than market rate sales etc) are not consider normal.

and let them live there for a while for free not paying anything,then buy it back, if they don't keep it and live in it for a short time and sell it to buy me a place for myself and that way they don't get my money and i still have a house.

Part 4A of the tax act is screaming at the minute - abnormal actions and decisions being considered to avoid paying tax. Good luck with it.

Keep it simple.

Go back to the reason you bought the property, do those reasons still apply, is the property still fulfilling those needs, if the answers still tick all the boxes why sell?

 

[Rob]

You should have moved into the house first for a month or 2. Then you could have moved back with your parents and maintained the main residence exemption on it for up to 6 years.

And to put the previous elongated post in simpler terms, if you give it away (or sell it at below market value), you're treated as if you got rid of it at market value.

 

[bullish23]

You should have moved into the house first for a month or 2. Then you could have moved back with your parents and maintained the main residence exemption on it for up to 6 years.

And to put the previous elongated post in simpler terms, if you give it away (or sell it at below market value), you're treated as if you got rid of it at market value.

Exactly. Only thing I would add is that initially move in for 6 months to ensure PPR status. I know there isn't any fix rule, however 6 months seems to be the agreed upon condition for PPR status.

 

[The Passenger]

you'll also have to pay CGT tax on rent that you charge, although this is then offset by what you pay on your mortgage.

as an example if you pay $2000 a month on mortgage per month and recieve $2500 rent a month, you'll be treated as having earnt an extra $500 a month ($6000 over the course of 12 months)... of course any maintenace on the house is offset as well.

as a general rule though, its highly unlikely first home buyers will make anything from rent.

i wouldn't whinge too much about paying CGT. If you are paying CGT then it means you have made money so you can't be too worried about that.

if you haven't made money on the house, then you won't pay CGT... I'd be far more worried about that situation because it means you've probably lost money.

as a disclaimer here i could be off the money but that's my understanding anyway.

I'm also 99.99999999999% sure if you lose money on an investment that can't be deducted from your income so that you end up paying less tax again.

I.e. if you earnt $40,000 in 2007-2008, but lost $15,000 on your property, your income is still $40,000 not $25,000.

 

[bunsen burner]

you'll also have to pay CGT tax on rent that you charge, although this is then offset by what you pay on your mortgage.

Income tax, not CGT.

 

[Rob]

Income tax, not CGT.

And you get a deduction for your interest, not your repayment.

 

[SolidTiger]

What is there to prevent the OP from moving in the house for say 24 months and effectively make it his principle residence and then sell the house?

 

[TurboHead]

HE would still have to pay CGT on the growth before he moved in.... have to live in it first to claim PPofR.

Though if you live in it before selling you could "shift" some of the growth into the period that it was PPofR and save a little tax.

 

[Smyth94]

Income tax, not CGT.

Exactly,

CGT isn't a separate tax

To the OP, next time make sure you keep in touch with a registered tax agent or an accountant - and you would've known about the primary residence exemption, it would've saved you a lot of $$$.

 

[FRUMPY]

If you sell the property for a profit, then you pay tax on the profit (otherwise none as Captial Gains Tax). However if you have owen it for over 12 months you only pay tax on 50% of the profit.

For example, if you paid $200000 and sold it 2 years later for $250000, you make a capital gain of $50000. The net capital gain is $25000 (as 1/2 of the capital gain is discounted by 50% as you have owend it over 12 months).

The $25000 net capital gain is treated as income and adds onto any other income. You then pay tax on total assessable income at the rate, depending on your level of income. If you are in the 30% tax bracket you would pay $7500 on the capital gain. (30% of $25000)