Nader and Jasmin: $500K Tax Savings, $100K Loss Management
Nader and Jasmin, after dedicating fifteen years to their careers, have embarked on a world tour starting January 2023. They own several investment properties and a primary residence. In October 2018, they relocated from Melbourne to Sydney, where they purchased a new home and rented out their Melbourne property. During their travels, they’ve decided to rent out all their properties, including their Sydney home. Now, they are planning to sell both their Sydney and Melbourne properties to enhance their cash flow, while retaining their investment properties for steady income.
The Melbourne property is expected to yield a capital gain of $500,000. However, they’ve observed a depreciation in their Sydney property’s value since its purchase. This property, a two-bedroom apartment in Sydney, showed a market value loss of approximately $100,000 at the time it was leased. With no expectation of a price increase in 2024, they are now exploring ways to minimize their capital gains tax liability and have reached out for professional advice on the matter.
Key Consideration –
The main residence is generally exempt from Capital Gains Tax (CGT). Typically, a property ceases to be the main residence of a taxpayer once they stop living in it. However, for CGT purposes, a taxpayer can continue treating a property as their main residence in the following scenarios:
- For up to 6 years if they used it to generate income, such as through renting (often referred to as the ‘6-year rule’).
- Indefinitely, if they did not use it to produce income.
During the period the taxpayer continues to treat the property as their main residence after vacating it:
- The property remains exempt from CGT, as if they were still residing there, even if they start renting it out.
- The taxpayer cannot designate any other property as their main residence, with the exception of a transitional period of up to 6 months if they are in the process of moving to a new house. [1]
Assessment –
- They can choose to designate a property as their main residence in the income year when a Capital Gains Tax (CGT) event occurs involving the property. This is typically done while preparing their tax return.
- The Melbourne property, first rented out in October 2018, can be considered as their principal place of residence under the 6-year exemption rule.
- The Sydney apartment served as their home until it was rented out in January 2023.
- They can only designate one of these properties as their Principal Place of Residence (PPOR) under the 6-year exemption rule.
Outcome –
After careful consideration of all the relevant details, they have resolved to sell the Melbourne property first and claim the Principal Place of Residence (PPOR) exemption for it. This will exempt any capital gains tax on their total profit from the sale of their property, which amounts to $500,000. This exemption will enable them to travel the world without concerns about tax implications and cash flow. Consequently, this decision means that the Sydney property will be subject to capital gains or losses from the outset. Should they sell the Sydney property and incur a loss of $100,000, it will be recorded as a capital loss in their tax return.
Nader and Jasmin’s case study serves as a vital lesson in the intricate dance of property investment and tax planning. It underscores the importance of making informed decisions that align with both current tax laws and personal financial goals. Understanding the nuances of capital gains, losses, and the implications of the Principal Place of Residence exemption can significantly impact your financial well-being.
If you find yourself navigating similar complexities or simply wish to optimize your property investments for tax purposes, don’t hesitate to seek expert guidance. We encourage you to reach out to Investax Group, specialists in property tax accounting. Our team of knowledgeable and experienced accountants can provide you with tailored advice, ensuring that your property investments are as profitable and tax efficient as possible.
Reference– Treating former home as main residence
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