Dreaded Tax Question

[Matt_971]

Hey fellas.

This is for the tax gurus out there. We are seeing an accountant soon but I got this in me head and need to figure it out to sleep well lol.

We have a rental property which earned $5500 ($200 a week) worth for us this few months.

Our interest only payment is $220 a week. now I think we call this negative gearing correct?

What I want to know is if we claim the interest as a deduction do we then have to pay capitol gains tax if we sell. And what are the conditions. I have read about living in it first and not renting for longer than 6years.

Both these are true. It was our house then we moved for work. but kept house. and it has only been rented for 6ish months. If we sell within that 6year gap what do we have to pay

Also whatelse can we claim without affecting CGT? Like council rates, water rates, depreciation etc etc.

Any info would be good. Not looking for ATO documents just a yes or no answer would be good. As I said accountant will be working the finer points out for me.

Cheers

Matt

[R-SPEC]

You can claim a lot of things on your investment property. Number 1 is the depreciation, then there's things like insurance, rates, interest, property management fees and maintenance without incurring any CGT. Negative gearing is when your expenses outweigh your rental return/income, so yes, you're correct.

You will have to pay a CGT on the property if you sell the asset and it is realised for a sum of which is more than you paid, provided you have NOT legally established that property as your principal place of residence for a certain period of time. So it looks like you'll be exempt from CGT if you did sell it. If you do pay capital gains tax, it will basically be added to your taxable income for that financial year. This is why blokes often purchase an investment in their wife/ partner's name.

There are dozens of factors that will attribute to your income tax and investment property and you'll probably have some difficulty in understanding all of it so leave it to your accountant! So in other words, you can freely claim all the of above without copping CGT.

Correct me if I'm wrong but this is my understanding

[Matt_971]

that's good news for me then

first calculation without using interest as deduction was me paying 5k in tax but that helps me sleep better now lol.

I will let ya know what accountant says will affect CGT and anything else etc.

Cheers for response.

Matt

[bcl]

If you have held an asset for more than 12 months, 50% of the capital gain (not 100%) is added to your income for tax purposes.

The capital gain is modified via indexation, so you will have an extra reduction to apply that you may not have considered.

I think it is more complex if you have lived in the place for a while, then rented it out for just 6 months. If say you lived in a place for 12 years, then moved away because of work for 6 months, then decided to sell, I would expect at worst a pro-rata to be applied I.e you would not be taxed on the capital gain from 12.5 years ago, rather more like 1/25 of the gain.

No doubt you would not have got a valuation of the property when you started renting it, so only approximations can apply.

Best to get advice from an accountant.

Brian

[Guest]

I would get a valuation of the property estimated back to when you first started renting it out ASAP. The higher the valuation the better too but it needs to be realistic.

I'm no tax expert so I'll leave the rest for one of those to come along

cheers

[Matt_971]

ok so I will be paying CGT on it this year JUST for renting it out.

I thought it only comes into play IF we sell it.

I havent sold it yet. Isnt for sale just got a few ideas in my head.

[tig]

Matt, I have a few properties which I rent out and also develop and found that Somersoft property forums has been really helpful and there are are a lot of folks there with a lot of experience , bit like this forum except we are into houses to. Lots of sub -forums like accountancy- tax - where to buy - adding value - property management etc. Even though you must use an accountant it a least helps you understand some of the implications involved in investing and takes some of the mystery out of the whole process.

Good luck with it. Cheers, Geoff

[turbotrana]

if you never lived in the property from day 1 there will always be a component/proportion of capital gains regardless of whether you move into it or not.

if you did live in it when you bought it then rented it out, then there is a provision where you can treat the home as your sole and principle residence for a period of 6 years and if you sell it within this time period no capital gains tax applies.

if you rent from purchase date, live in then rent then could use above 6 year provision but there will still be a component of cgt from first rental

ps there are alot of accountants who dont have a clue

Edited 29/07/08 12:54 PM by turbotrana