Would you sell if you were me?

[nauq]

I'm fortunate enough to be in a position to be a homeowner to two properties. One as our PPOR and the other as an investment (single dwelling with a granny flat).

My partner and I lived in our investment property for about a year before moving out and purchasing our current home. I was told about the 6-year CGT rule (basically exempt from CGT if I lived in my investment property within 6 years of selling) and it's gotten my partner and I thinking if we should just call it a day and cash out.

Purchased the investment property back in 2015 for c. $530k. Built a $120k granny flat at the back in 2017-18. The yield on both is quite decent, up until all these rate hikes. The main house nets us $420 pw, and the granny nets $370 pw. I'm still somewhat positively geared on them, but barely (probably pocket about $100 a week).

Comparables in the area show I could sell the investment for $1m. Based on some rudimentary math (selling price - mortgages - sellers fees) I stand to pocket roughly $420k, excluding the CGT I mentioned earlier. If I were to sell, I would return the $50k my parents gave me to help me purchase the house, as well as another $50k on the side for a specific reason my partner and I want to explore.

That would leave me with just over $300k. My current line of thinking would be to invest half into a safe ETF, and leave the other half in the bank to help offset my current mortgage for my PPOR (at around $600k).

Would you sell if you were me? For context, partner and I are 30 years old, currently have combined total of c. $70k in cash, no other investments. I make $130k pa working in government, partner is a healthcare worker that makes a bit under, since they're a 0.8 FTE.

Any and all thoughts are welcome, and happy to answer any questions!

 

[homeowner]

@nauq The 6 year rule doesn't work like that

If you move out of your home and rent then it applies

If you move out of your home into another home you own then it doesn't apply

You can only have one PPOR CGT exemption at a time, with the exemption of the grace period you get to sell a place after buying a new one.

 

[suzanne123]

@homeowner If you choose not to use the PPOR exemption on your new house during that time I think you can still use it.

Terry Waugh posted on PC a couple of months ago on this.

https://www.propertychat.com.au/com...the-6-year-rule-to-multiple-properties.73499/

It is possible to apply the 6 year rule against multiple properties. But generally, only one can be the main residence for any overlapping period. This means, generally, that only one property could be fully exempt where there is an overlapping period.

Example

Bart buys 123 Smith Street on 1 Jan 2020 and moves in. He moves out on 1 July 2020 and starts renting it.

On 1 July 2020 he buys and moves into 456 Jones Street and establishes it as his main residence. He moves out on September of that year.

Bart could use the 6 year rule on either property. He has a choice.

But if Bart sells Smith Street in 2023 and claims the full main residence exemption on that property that will mean he cannot claim Jones street was his main residence for the whole ownership period as it wasn’t his main residence, for CGT purposes, because Smith Street was.

A taxpayer could use the 6 year rule on multiple properties, but just not for any overlapping periods. For overlapping periods they may have a choice as to which of 2 main residences they could apply the full CGT exemption to. Note also that spouses only get one main residence exemption between them so if Bart’s spouse counted a property as their main residence this may prevent Bart from also claiming a property for the same period.

 

[mariannelr]

@suzanne123 If you use it on the first house. Then you will be paying it on the second house. Only one prime residence. Other is an investment.

 

[suzanne123]

@mariannelr Yeh, that's how it works. There are still lots of reasons you could want to use this though.

For example if you plan on staying in your current PPOR for a long time, are in the top tax bracket now and lots of the gains have come in the last couple of years which otherwise wouldn't be covered my the exemption it can be a good choice.

If you stay in your current PPOR for a long time then you just owe tax on the overlapping years it wasn't your main residence. Over time the impact of that will be inflated away and if you aren't working and don't have high income from investments you'll be in a lower tax bracket.

 

[nauq]

Just wanted to thank everyone's responses this morning. I've read through each one and everyone makes great points. Also, it seems I've misinterpreted the CGT exemption and may be liable to indeed pay it, which would obviously skew my decision towards retaining the asset (might need to talk to my accountant about this). Appreciate all of your input!

 

[elina8000]

@nauq You haven’t misinterpreted. Many of those responding have. You have the choice of applying the MRE to your investment property under 6 year rule, even if you’re living in another house. However, by making that choice, it means you can’t treat your current PPOR as your main residence during the time covered by the choice, meaning your current home will be subject to CGT to some extent when you sell it.

The tricky thing with your scenario is that the investment property contains two dwellings (the main house and the granny flat). You’re renting them separately, so you can’t argue they’re the same dwelling. Accordingly, any choice to apply the six year absence rule will only cover the house you originally lived in.

 

[alij777]

@elina8000 This is the correct answer

 

[alexalex1]

@alij777 What the ATO givith with one hand, the ATO takeith with the other.

 

[aspchizo]

@alexalex1 What the ATO giveth with one hand, the ATO taketh with two.

 

[bboyd8800]

@nauq Also keep in mind that your borrowing capacity will decrease if you have children. So even if you sold now, you may never get that loan again (unless your salary jumps a bunch)

Finally, selling is easy. Buying is really stressful and requires a lot of work. Dont make a hasty decision when selling.

 

[monkish]

@bboyd8800 Exactly this post

All What ifs also “the house nearby sold for 1 million “

Your House is only worth what agent you get , the Marketing budget , and ultimately what the buyer is willing to pay , that house may have had something to the buyer so they paid more for it

Selling a house shouldn’t be to make money should only be for a needed sale (pay someone out)

 

[monkish]

@bboyd8800 Exactly this post

All What ifs also “the house nearby sold for 1 million “

Your House is only worth what agent you get , the Marketing budget , and ultimately what the buyer is willing to pay , that house may have had something to the buyer so they paid more for it

Selling a house shouldn’t be to make money should only be for a needed sale (pay someone out)

 

[snapdragon117]

@nauq I asked a similar question to my accountant just the other day. He advised me that you can only claim the 6 year CGT free if you do not own another PPOR. So it appears that you are going to have to pay the tax man if you want to sell. Obviously, talk to your accountant about this.

 

[lindseym1013]

@nauq Why would you sell a good investment costing you nothing and growing in value?

Also if you do claim the PPOR exemption, you can’t do it again for your current place for the same time period

 

[rawkintheworld]

@nauq What reason do you have to sell?

The asset has appreciated.
It will continue to appreciate.
It supports most of the cost in holding the leverage asset.

Your parents wanted to help you purchase and presumably understand that something like that is a long term lend, start to pay it back as though it was a small mortgage, you make decent income.

Your partner and yourself have an expense you want to pursue, start to see if you can afford that cost, you have good savings now, ensure you still have adequate emergency fund and or savings and go for it.

Lowering the interest of your current loan, just pay it down as much as possible if it is the major stressor in your lives, if you have an early retirement goal or a "stay at home" plan for children or something, you make a decent income for a 600k debt.

An ETF portfolio, you are extremely young, and have a decent head start, just invest, make small weekly contributions that you can afford and slowly build it.

If there is anything providing much more stress than laid out just exhaust all your options and see what you can do before selling,

Just remember The rental income will be greater than a small ETF portfolio,
A million dollar asset will likely outperform a small ETF portfolio,
You have the money now to pursue the spousal expenses, check if you can cash flow it,
If your parents need the money asap, you have it in savings, check how much you need to cover an emergency fund and communicate with them how long it will take to accumulate the rest.
The tax benefits of an investment debt will also help in a similar way to offsetting.

 

[dreamingmoon]

@rawkintheworld Only because that $1m asset is acquired via gearing.

Sounds like OP wants to take risk off the table by selling up investment property

 

[rawkintheworld]

@dreamingmoon Yes, this is exactly something that came to my mind as well,
I considered the risk aspect when reading through the post,
And to be perfectly honest, it seems like a very safe, risk adverse position to be in,
I would go as far as to say better than most.

The debt on the asset is really quite reasonable, LVR debt ratio looks great, the rental income is even covering the costs of the mortgage after all the rate rising.
Many people were quite happy supporting payments on an IP before the rate increase.

The debt on the PPOR is also very reasonable also,
Seems very low risk.

 

[chaz1821]

@rawkintheworld People tend to forget the leverage that the investment property has. Your return of your actual invested funds is normally higher than investment returns in other funds.

You can't beat gearing - especially if the investment has proven to be a reliable asset like property investment.

 

[bb123]

@rawkintheworld Best answer here ♤