Ian Rodrigues from Bishop Collins Group answers Karen’s question about capital gains tax on a holiday home. His answer is fascinating and so too is his comment about a principal place of residence.
Kevin: I want to answer a question now that came in from Karen. Thank you, Karen. I understand that Karen and her husband, while they love listening to the show, they do it on Saturday morning lying in bed with a cup of tea.
Well, as you’re listening this morning, Karen, with your cup of tea – and I hope your husband got it for you – it’s good to have you in the show, we’re going to answer your question. Ian Rodrigues, who is the Director of Bishop Collins Group, joins me.
Good day, Ian. How are you?
Ian: Very well, Kevin.
Kevin: Good, mate. Thank you very much for your time. Let me read this question from Karen:
“I’d like to find about capital gains tax in relation to a holiday home that we own. The ATO says that costs relating to the acquisition, holding, and disposal of an asset can be added to the cost base. Does this mean that we can add the interest we pay each year to the cost base?
“Unlike our other rental properties, where we claim the interest as part of the costs each year, this house has never been rented, so we weren’t claiming anything, but as it isn’t our principal place of residence, it will be subject to capital gains tax. At this stage, we have no intention of selling the place and are likely to move into it as our retirement, but I’d just like to get my head around the things that we should ensure that all the paperwork is in order.”
Quite a few interesting points inside there, Ian, aren’t there?
Ian: There is. It’s good to see Karen and her husband thinking about these things because it is important to plan for it. The short answer to Karen’s question is yes, you can.
The question about cost base on this asset is if you’re not renting it, all those costs – acquisition, holding, disposal, interest rates, repairs – all those things need to be kept a record of so that you can add them to your cost base. Obviously, it becomes a bit of a task over the years because you have to remember to substantiate those and keep records for it, but in essence, when the property does get sold, those costs are effectively a tax deduction in the sense of they’re part of that cost base before calculating the capital gain.
Kevin: Karen makes a point in there about she says this particular property, it was never rented out, so therefore it doesn’t qualify as their principal place of residence. Is that in fact the case?
Ian: You need to be really careful here and look for some opportunities because the rules about principal residences are you need to establish a place that it’s your principal residence, which means that you live there. Now living there can be a range of things, but my view of the world is that you can have 20 principal residences.
If you choose to have a house in every town and live in them for part of the year, that’s your call. You may well establish all of them as your principal place of residence. The only thing the Tax Act says is that you can only choose to have one for tax purposes.
Kevin: That would trigger at the point of sale?
Ian: Yes, so the point at which you need to decide which one you’re going to claim is when you sell one of them. A lot of people, and Karen may be one of the lucky ones who may have a house that they primarily live in and have a holiday home that they live in part-time that may well both qualify as principal residences, but it may be that their home is pre-capital gains tax, in which case, you wouldn’t bother claiming that as your principal residence, and you may well be able to claim the secondary dwelling that you have as your principal residence, and one’s pre-CGT and one’s principal residence, and both may be exempt from capital gains tax.
Kevin: Wow. That’s interesting, yes.
Ian: It is a point that a lot of investors and taxpayers may not realize there are other opportunities like that. Pre-CGT, which is September 1985, is becoming a little harder and harder to find, but there are a lot of people of retirement age now where their main house is exempt anyway. Therefore, having a second house as a principal residence gives you, I suppose, two bites at the cherry.
Kevin: Yes. I can just see Karen and her husband in bed now have probably spilt their cup of tea. That’s some pretty good news there, Ian.
Ian: It may well be. The facts of the circumstance are the bit I don’t really understand – the whole history of what house they own and where they live and how long they live there. They need to go and see their advisor and get some advice about would this property qualify as a PPOR and it may well be, yes, as you say, the best news they’ve had this morning.
Kevin: Well done, and Ian, thank you very much for that advice. Karen, if you want to contact Ian and his team, you can do it just by contacting them through their website, Bishop Collins Group.
Ian, thank you very much for your time.
Ian: No problem, Kevin. All the best.