The Tax Issues of Buying a Main Residence which is initially tenanted

Imagine you buy a property with the intention of moving in, but there is a tenant whose lease doesn’t expire for another 6 months so you keep renting and wait for them to move out so you can move in.

What are the CGT consequences of this?

Well, that property will always be subject to CGT as you did not move in straight after purchase.

But all is not lost because CGT will be minimal to almost nil where you remain living in the property for a number of years. Furthermore 3rd element cost base expenses can be used to reduce CGT even further.

Example

Homer buys 123 Smith Street, but the contract indicates it is not vacant possession. It will come with a tenant with 6 months left on the lease.

Contracts signed on 1 July 2019, but Homer doesn’t move in until 1 Jan 2020, with a hangover.

Let’s say Homer sells that property in 2030, signing contracts on 1 July.

Will he pay CGT?

He might, but it may be a very small amount.

The first thing to consider is work out the time period it was rented as a percentage of the total ownership period.

6 months/132 months = 4.5%.

So, at the most the capital gain would be 4.5% x 50% x the gain or 2.27% of the gains on the property. Bugger all – note the 50% is the 50% CGT discount applied for holding the property more than 12 months.

But before this is done, the cost base has to be worked out. The capital gains is the sale proceeds less the cost base.

The cost base expenses include buying and selling costs and, importantly, the interest, rates, repairs and costs while living in the property can be taken into account here and they will further reduce any CGT, potentially bring it down to nil as over 11 years these costs would add up.

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