If the house is subject to CGT, be sure to use a tax accountant. There is a lot of money involved and it is best to seek help when dealing with complex financial matters.
I am aged 58 and my husband is 60. We stopped working when the pandemic began, although my husband may start again in the future. We own our house worth $2.5 million, with a mortgage of $1.4 million and $365,000 in a mortgage offset account. We also have a residential investment property worth $2 million, with a mortgage of $1 million, and generating income of about $45,000 a year. We are considering selling the investment property but are concerned with the likely CGT. It used to be our principal place of residence, as we built the house in 2006 when it was then worth about $750,000. We lived in it for about 10 years and, when we moved out, it was worth $1.3 million. The property has now been rented for six years. If we sell it, what is the most effective use of the money? We have other property, including $700,000 in mortgages, but negligible amounts in our superannuation accounts. CW
If a person moves out of their home, they can rent it for up to six years and sell it without being subject to CGT, providing they do not claim another home as their principal residence.
Accordingly, you may be able to nominate what is now your investment property as your main residence. This would mean that your current home, when you eventually sell it, would be subject to CGT, calculated proportionately, based on the first six years in which it was not your main resistance (2016-2022) and the rest of the time (2022 to whenever) when it was your main residence.
Use a tax accountant to help minimize the CGT.
If, after much pondering, you decide that your old home ceased to be your main residence when you started renting it in 2016, you are considered to have purchased it at that time. Your CGT cost base would be $1.3 million – its value then.
Let’s say you could increase the cost base by $150,000, using any outlays that were not claimed as a tax deduction, along with the cost of sale. This would mean you could have a capital gain of $690,000 ($2 million less $1.45 million), half of which would be subject to CGT.
If the tax comes to, say, about $140,000, you should walk away with about $1.86 million.
You could then speak with your lender about rearranging your mortgages so that you could pay off your non-deductible home mortgage first.
Each of you could then make tax-deductible contributions into super of $27,500, which could reduce your tax.
I would then put about $770,000 towards your investment mortgages. A retired couple is better off with minimal debts at a time of rising interest rates.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. All letters answered. Help lines: Australian Financial Complaints Authority, 1800 931 678; Centrelink pensions 13 23 00.