Ken Raiss answers some of your questions about tax, capital gains and capital loss and where you stand in changing the status of your principal place of residence. He deals specifically with questions from Andy and Marie.
Kevin: A couple of questions we’re going to answer on the show now. Joining us, KenRaissfrom Metropole Wealth Advisory.
Ken, thanks for your time. How are you?
Ken: I’m well, Kevin. How are you?
Kevin: Good. I think we caught you in sunny Melbourne today too, haven’t we?
Ken: Yes. It’s a bit cold compared to some other states, but beautiful weather.
Kevin: Good on you, mate. A couple of questions, the first one from Andy: “Most people always talk about capital gains and having to pay capital gains tax, but is there a capital loss? Do you claim the loss if you sell at a lower price than the purchase price?”
Ken: I’ll answer it quickly and then a bit of detail. You can claim capital losses, but only against capital gains. What you do is when you have a capital loss, you net it off your capital gain that you could have had in a previous period. It doesn’t matter where that gain or loss comes from, so you can mix profits and losses from different assets, but the loss gets netted off against the capital gain and then you apply the 50% discount.
One trap, though, that a lot of people forget is if you’re talking property, you have to add back the depreciation that you claimed on the building. This reduces your costs when calculating the gain or the loss.
You have to be careful that a capital gain or a loss can only be claimed if you’ve kept that property for more than 12 months if you want the 50% discount. If you have sold that property in under 12 months, it’s still to the capital account but without the 50% discount. And secondly, the date of sale for tax is the contract date, not completion, such as settlement. Hopefully, that answers your question.
Kevin: I’m sure it does. Thanks for your question too, Andy.
I want to move to another one. This one is from Marie, multiple questions in this one. I’ll give you the situation, Ken. Marie writes in saying she has a house in a capital city purchased in 2006. It’s her principal place of residence. In January 2014, Marie remarried and moved to another city and lived in her new husband’s home, which is in his name solely. She then rented out what was previously her principal place of residence in that capital city.
Question number one: “If I wish to retain my house in the capital city as my principal place of residence, will I need to move back into it no later than January 2020 due to the six-year rule?”
Ken: You can only have one main residence for tax purposes, and that includes that property that could either be in your name or your husband’s name. Between you, now that you’re a couple, you can only have one property for exemption on the sale. So, you will have to decide whether you want that to be your property or your husband’s property.
But the beauty is you only have to decide when you sell one of them. At that point, you will then work out maybe which one would have got you the better tax results and then claim that one for tax purposes.
It’s going to be a bit hard in six years’ time, so what I’d be doing is I’d be getting some market valuations for both your property, Maria, and your husband’s so that you have a starting point to do a calculation, depending on what happens in the future.
Kevin: And then take some professional advice.
Ken, just a second question from Marie – and I’ll ask this quickly – if she were to move back in January 2020, how long would she have to physically stay in the house to reestablish it as her principal place of residence? Is there a timeframe?
Ken: There’s no timeframe, because you could move in and then all of a sudden, get a job transfer or whatever. You must move in with the intention for it to be your principal place of residence and therefore occupy it as your home, which means you’re going to have to change all the records – voting records, driver’s license, bank accounts, having mail delivered.
Kevin: Oh, yes. Show evidence that you’re actually living there.
Kevin: Can I move to the third part of this situation from Marie? Alternatively, instead of moving back into her principal place of residence in January 2020, could she transfer or gift the house in the capital city to her adult child before that time – January 2020 – by creating a bloodline trust with her as the settler and he as the beneficiary? If she does transfer or gift the house to her adult child, would the capital gains be exempt because it is her principle place of residence?
Ken: You can always do that, but it will be a trigger for both capital gains tax and stamp duty. And both the tax department and the relevant state government will apply market rates at that date, so you can’t call it a lower number. It’ll have to be done at market rates, full capital gains tax, and then obviously, stamp duty by changing the title.
The other thing you have to be very careful of, of course, is that while that place is not your principal place of residence because you’re not living in it – which is different to tax – you have to look at land tax, because maybe you’ll need to start paying land tax. And the various state governments have got different land tax rules dependent on whether the property is in a person’s name or in a trust. So they have different rates to calculate land tax depending on the structure.
Kevin: A lot to get through there, but I want to thank you, Ken, for helping us, and Marie and also Andy, thank you for your very good questions.
Ken: Thanks, Kevin.