Quick question for the accountants of CGT calcs

Had a client call today and she has sold a property and getting conflicting advice.
The scenario:
Client bought a property, lived in it for a year or so and then rented it out. She recently sold it for a modest Cap Gain.
When she works out her cost base for CGT calcs, her accountant said that because she lived in the property after purchase and before renting it out, she cannot add stamp duty to the cost base.
Is that correct?

 

I am not an accountant but...

thats correct.
Cost base is reset to market value when income producing.
assuming she not using the 6 year rule - otherwise could be fully exempt potentially.

 

Thanks Terry. Her accountant at first said the SD was added to the cost base, and then said it wasn't.

 

Here is the relevant law
INCOME TAX ASSESSMENT ACT 1997 - SECT 118.192 Special rule for first use to produce income

 

Spot on. s118.192 resets the costbase to its market value from its historical cost. This i something I warn about to people who buy and use a first home concession and promptly rent it. Unless its a booming market at the time acquired the legals and duty will be carved out. People are stunned when I explain it.

BUT.. remember the 6 year absence rule may also apply. If so, the costbase is still reset but any gain in the max 6 years would be exempt anyway so who cares.

Any market where prices correct and where a property was always 100% exempt can expose this isssue. I warned about it in the NW WA boom towns which all crashed.

Eg David buys a home in Broome in 2010 during the boom. He is a mining engineer, He paid $700K. He is later made redundant in 2010 and must move to find work. He also realises his property is probably worth $450K. So he rents it and gets his rent. Ten year later he sells for $680K. He says - I lost money no tax to pay ? Right ? And can I calaim to $20K CGT loss. Paul says sorry there is a gain of $280K (based on a reset costbcsse of $450K. So he has to pay tax on 50% of $225K... He isnt happy. But if he had sold it within 6 years in 2016 then its 100% exempt and any gain can be disregarded.

Tip to avoid this : Has the home ever been used prior to rent when its not 100% exempt ? eg rented a room for few nights, rented over holidays etc ?? Or had tenants when it was first acquired ? Or not moved into as soon as practicable ? Used as a place of business ? If so the s118-192 rule may be bypassed.

 

I'll pass that on. She's not eligible for the 6 year exemption. Thanks Paul and Terry.

 

Hi Paul,

In your example, who determines the property is worth 450k? will a valuation be required?

 

It doesnt have to be but has to have a objective basis and data to support the value. You could do it if its present day if you had sufficient sale data on comparable sales etc. A detailed agent opinion with data may suffice too (not a one pager opinion). If you need to time travel back in the delorean you will need a reg valuer.