Tuesday, August 12, 2008

keeping your previous home as an investment property

Our customers upgrade and move homes for all sorts of reasons and many of them keep their original home as an investment property. They are generally aware that in most cases, the cost of servicing the existing debt on their old home then becomes deductible for tax purposes. However, many have not considered the capital gains tax implications of this kind of arrangement.

The previous home was their principal place of residence, and if sold, would normally attract no capital gains tax (CGT). Now that the home is being used for investment purposes, any future sale of that property is most likely going to trigger a CGT event and some amount of tax will probably be payable. How this is calculated can be complex but it is important to note that CGT will be calculated on the difference in value of the property from the date it was first used as an investment and the sale price when it is finally disposed.

If you are considering such an arrangement it will be important for you to establish the value of your home at this time. To do this you should have the home properly valued by a quantity surveyor or a registered valuation expert.

As the amount of tax you will pay in the future depends on current and future values, it will be ideal to for your house to be valued at as high a price as the valuer can professionally allow. This will help minimise the difference in the sale price and the current price and therefore help minimise any future capital gains tax.

As always, before you make any decisions regarding investing your money, consult your accountant or financial advisor and get advice best suited to your individual circumstances.


Abby said...

Don't forget that, if they only keep the house for a few years, CGT is dependent on whether you lived in your home for 3 of the past 5 years. So valuation is really on a factor if they keep it for over two years.

That said, most investment homes are kept for the long haul. So this is great advice. You certainly never want to go with the city estimate, as it will be vastly different from any selling price you could get.

And if they do plan to rent out the house, your clients would do well to rent it as a whole. In some college towns, landlords rent rooms. But for tax purposes, it's a better deal to rent the house as a single unit. Also, of course, it is just simpler!

Anonymous said...

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Anonymous said...

They are usually aware that in most situations, the cost of maintenance the current debts on their old home then becomes insurance deductible amount for tax requirements.

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