Our tax experts are on hand to answer any tax queries you have regarding your property investments and wealth-creation strategies. Email your taxing questions to firstname.lastname@example.org
Calculating capital gains tax
Q: I am selling my investment property that I have owned for six and a half years. I have been getting $200 per week in rent, I paid $360,000 and am selling for $387,500. How do I calculate capital gains tax? The property was jointly owned until 10 December 2012, and I bought out the other party.
A: There are a number of issues you need to consider in calculating any capital gains tax (CGT) when you sell a property. I will discuss these below.
Initial cost base of asset
You have stated in your email that the original purchase price was $360,000.However, you can add incidental costs when you work out the cost base of the asset for CGT purposes.
Some examples of initial costs that will increase the cost base of the asset are as follows:
- building inspections
- pest inspections
- stamp duty on purchase
- legal or conveyancing costs on purchase
- additional furnishing costs
Often in situations like yours, once the above costs are added to the purchase price the cost price can be as high as $380,000.
You do, however, have to reduce the cost base of the asset by the building depreciation (if the building was purchased after March 1997) and fittings depreciation that have been claimed in the six and half years that you have owned the asset. Particularly where properties are new, these can reduce the cost base of the property for CGT purposes quite significantly. I have seen situations in which the building depreciation alone has reduced the cost base of the property by $40,000 in a six- to seven-year period.
Apportionment of land and building value
In addition, you will have to apportion the sale price between the land and the building and you will need to do this in conjunction with a valuer who can value the land component of the sale, with the difference being attributed to the building. Before you discuss a CGT calculation with your accountant, you will need to be sure that the land value is arrived at.
You said in your questions that the sale price is $387,500, and I assume that the 50% purchase you made on 10 December 2012 was at $387,500. If this is the case, then you will have to apportion your CGT calculation between your 50% initial overall purchase of $360,000 and your 50% purchase at an overall purchase price of $387,500.
In determining your net sale price, certain costs can be deducted to give you the net proceeds of sale from which the capital gain can be calculated. Examples of the costs that can be deducted from the sale price are the agent’s selling fee and the conveyancing/legal costs.
After your net sale price is calculated and compared to the correct purchase cost base adjusted for any depreciation, you can then calculate your capital gain or loss.
Finally, you should be aware of the following:
- If you have a capital gain and the asset is held for more than 12 months (contract exchange dates are the relevant dates in this regard), you can apply a 50% capital gains discount against the capital gain.
- If you have a capital loss, you can apply this loss to other capital gains or carry it forward for an indefinite period in your current and future tax returns.
Capital gains tax when moving out of principal place of residence
Q: My husband and I currently own the two-bedroom apartment in Narrabeen we live in, worth approximately $510,000 (purchased in 2007 for $430,000 and has an estimated $520 per week rental possibility), and a two-bedroom apartment in Collaroy which we purchased in 2009 for $403,000 using some equity from Narrabeen. The investment has recently been valued at approximately $485,000, and we are currently receiving $430 per week in rent.
As we now have a child, we need a larger place and we are unsure of what step to take. Ideally, as we are both only in our early thirties, we would like to hold on to at least the Narrabeen property or both if possible, to secure us for the future.
We have a combined salary income of approximately $130,000, although we would like to have another child in the next year or so, which would mean maternity leave for a short time.
We are unsure if we should consider renting out the apartments whilst we rent a home ourselves, or if we should sell the Collaroy apartment (in such a little time the CGT would eat up most of our profit made), or if there is any way we could purchase a house and keep the two apartments as investments.
If we were to rent out Narrabeen for a period of time, would we need to pay CGT only for the time it was rented or for the whole time we have owned it?
The idea of buying a home and keeping the two apartments means we would have three big mortgages, although the idea of renting feels as though we would be wasting money when we could be putting it towards a mortgage.
My only real concern is: the idea to hold on to the investments is in the hope that the property prices will increase, but if this happens then of course the houses we would look to buy would also increase. There are currently plenty of houses for sale around the $750,000–$800,000 price range in areas where we would love to live, which we could afford if we sold both apartments. I need a crystal ball! What seems to be the best scenario in your opinion?
A: As Narrabeen is currently your primary place of residence (PPOR), it is exempt from capital gains tax (CGT). If you move out of your PPOR and use the dwelling for income-producing purposes, there may be CGT consequences. You have two main scenarios to consider:
Firstly, if you choose to move out of your Narrabeen dwelling to rent a larger home, you can continue to claim an exemption from CGT for up to six years after you move out. Secondly, if you move out of your Narrabeen home because you have purchased another dwelling, you will need to elect which dwelling is to be your PPOR as you cannot have two main residences at the same time for tax purposes.
If you sell the Narrabeen dwelling in the future, after having used it for income-producing purposes, and it has not been your PPOR at all times, you will only get a partial exemption for the period it was your PPOR. The CGT calculation will be apportioned over the number of days the dwelling was not your PPOR.
In regard to your other questions, you need to look at your current financial position in conjunction with your financial advisor and calculate whether or not you are able to afford to maintain all three dwellings. The fact that you would like to have another child is important, as this may add financial pressure. You can speculate on house prices, but you need to ensure you can financially afford to do so.
Do you have more than $200k in your super fund? You could use your super to buy property - Find out how