Got tax queries regarding your property investments and wealth creation strategies? Our experts are on hand to answer them.
Q: I have two investment properties and would like to sell one of them.
Property A was purchased on 15 September 1999 and was my home until 2009. I then moved into another PPOR purchased in 2009. Property B was purchased on 14 October 2014 using the equity in Property A, and the loans were set up as cross securities.
I would like to sell Property A, which has been generating rental income since 2009, and use the proceeds to pay down Property B’s loan. Currently, Property A is valued at $550,000, with a loan balance of $300,000. Property B is valued at $290,000, with a balance of $246,000. What are my CGT obligations on the sale of Property A, in consideration of the proceeds being used to pay down Property B?
With Property A I have had planning and subdivision permits and working drawings for construction created. Can we claim these against the cost of the property to reduce CGT?
A: If you start using your main residence to produce income and you are unable to utilise other potential main residence exemptions such as the six-year absence rule, then the ‘home first used to produce income’ rule is available.
With this rule, you are taken to have acquired the dwelling at its market value at the time you first used it to produce income, provided you acquired the dwelling on or after 20 September 1985 and you first used it to produce income after 20 August 1996.
With Property A, your main residence from 1999 to 2009, a market valuation should be prepared as at the date it was first used to produce income in 2009, to gain a starting cost base. Independent property valuers can retrospectively prepare a market valuation.
Where you ultimately direct the sale proceeds of your property does not affect the capital gain/loss calculations
After the date of the market valuation, any costs incurred to increase or preserve the value of your asset (that have not previously been claimed as rental property deductions) should be available to be added to the cost base of the property. If the subdivision has not proceeded, we recommend speaking to your tax adviser for further specialist advice, but associated costs incurred should be available to be added to the cost base of Property A.
Assuming Property A was sold for $550,000:
- The starting cost base would be the property’s market value in 2009 (eg $350,000)
- Plus any additions made to the property postmarket valuation date (eg $10,000)
- Less depreciation on the property while it was a rental property (eg $30,000)
- In this scenario the capital gain would be $550,000 less the $330,000 cost base = $220,000
- After the 50% discount for holding the asset longer than 12 months, the net capital gain would be $110,000 (taxable at your marginal tax rate in the financial year the contract to sell the property is signed)
Where you ultimately direct the sale proceeds of your property does not affect the capital gain/loss calculations. For example, if the sale proceeds of Property A went towards closing Property A’s loan and reducing/closing Property B’s loan, it would not change the capital gain/loss applicable to the CGT event.
Need to know
- Your (former) main residence can produce income for six years CGT-free.
- A valuation should be prepared on the date your property first produces income.
- Where you direct property sale proceeds does not affect CGT.
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