Rebuilding Damaged Property by Tenant

Discussion in 'Accounting & Tax' started by Patrick Lim, 8th Apr, 2022.

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  1. Patrick Lim

    Patrick Lim Member

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    Hi all,


    I have a property that has been damaged totally by a tenant. The insurance has paid me a small amount for the building and my contents as well as 12-months rental. Due to the extent of the damage, I need to rebuild it.

    I have done some reading, but find that this situation is not very common. One of the article I find very useful is Property Damage From Fire - Tax & Insurance Traps to Avoid - Julia's Blog

    Here is my questions (many thanks beforehand):
    1. How do I calculate the CGT for the insurance payout of the building and contents?
    The link above provided says to calculate the Cost Base of the House. Is it using the Market Value of the Land just before the fire, or when I purchased it? Is the CGT then the difference between the Cost Base of the House - Insurance Proceeds? Do you have examples?

    2. The article above said that the costs while the property is rebuilt are tax deductible as long as I intent to use it for rental later. Question is, what if I changed my mind later and use it for PPOR?

    Thanks in advanced!
     
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    You need personal tax advice. The consequences will vary based on rebulding, or not. There isnt a CGT event as such. zyou wont pay CGT on the insurance BUT it affects later CGT if you hold or sell. There will be income tax impacts for some of the proceeds (lost rent) and some may affect the property costbase or be a rollover event to a replacement asset (with some strict time limits). The lost rent proceeds are usually considered assessable income. The catch is you may be limited or prevented from claiming deductions. Its a strange consequence of the vacant land holding rules which I disgree with. I believe receipt of assessable proceeds should allow holding costs for the same period to be a exception. I am not aware of anyone asking the Commissioner to fund a test case on appeal for this matter.

    In some cases scrapping could be a tax benefit IF you hold a QS report.

    The costs to rebuild are not tax deductible. Julia's article is very clear on this. One exception she uses is confusing as she discusses repairs. rebuilding is not a repair. If the building was lost then ignore that. She does mention some holding costs during the rebuild which are not now deductible except where a natural disaster gives exception. A accidental or deliberate building fire is not a natural disaster allowed an exception. Her article refers to recent bushfire so this may confuse. That may be a disaster if declared. But not a general fire. But a house washed away by flood would be IF a disaster is declared by the Govt.

    Given your poor comprehension of the article you really should seek personal advice.
     
    Last edited: 8th Apr, 2022
  3. Patrick Lim

    Patrick Lim Member

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    Thanks Paul, my usual tax accountant doesn't seem to know for sure what to do in this situation, but I'm reluctant to change, as he has been the one for many years. Do you think I should change? How do I choose a better accountant knowledgeable in this?
     
  4. Mike A

    Mike A Well-Known Member

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    a few around. i published a book for that reason so people had some confidence that i deal with property and taxes day in day out.

    once you find someone who "knows their stuff" the relationship dynamics are much more important. if you dont like them or they dont like you it just wont work.
     
  5. wylie

    wylie Moderator Staff Member

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    You have had answers from two just in this thread. That's a good place to start. ;)
     
  6. Patrick Lim

    Patrick Lim Member

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    Thanks mate, does tax law different from each states? Would it not be advisable to hire one from another state?
     
  7. Mike A

    Mike A Well-Known Member

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    no it wouldnt be necessary. federal law is universal. accountants cant advise on state laws so having someone from a particular state doesnt matter.
     
  8. Stoffo

    Stoffo Well-Known Member

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    Nominated for most misleading thread title 2022 :rolleyes:
     
  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Thats explains when. I would argue the longer they have practiced the better they should be. But some dont try hard. Its also a issue that property focussed accountants like myself, Mike etc see more commonly than some others who may rarely see complex property tax issues. I have handled probably 3-4 claims for total loss for rentals in the past few years. And each varies. Some are a total loss, some rebuild, some dont. Last week I did another flood one...One in the 2021 floods had the whole house float off its piers and down a river and out to sea. 100+ years old. But it was uninsured. The damage to fences and lost stock was more than the house loss. Someone kindly gifted them a replacement house which they trucked in. Thought that very kind.
     
  10. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Not necessarily. I had a client where the tenant poured petrol on the bed and burnt the whole thing down. Firies had to rescue his partner he locked in a room. Charged with attempted murder, arson and more. Other are just accidental. More complex cases occur when its a strata building that is lost. That why we insure.
     
  11. Mike A

    Mike A Well-Known Member

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    man how come i dont get interesting clients as that
     
  12. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Another was flooded to the roof last year....And this year the yard got flooded but the water levels dropped. $60K of repairs last year !!! Uninsured.
    I feel for them and have been not charging for the extra time. So interesting doesnt mean fees I'm afraid

    The one who didnt rebuild after the fire then had council ORDER site fencing and the slab to be removed. A neigbour wanted a new fence.....More money...

    I lived in a t/house in Melbourne years ago and same issue - Crazy man set bed on fire and just walked out. Gutted the who thing and smoked damage etc to each neighbour. For 6months the complex had a huge gap. Glad were were many away. Its a reason I dont like strata. All it take is one Ahole and all are affected.
     
  13. Stoffo

    Stoffo Well-Known Member

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    I had one where the evicted tenant returned that night, threw petrol around the entry and "woof", lost the building !
    Police were not able to prove the tenant actually did it, so insurance paid out.

    The title is misleading because it is easily interpreted that the title/question relates to the tenant rebuilding......
     
  14. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Lucky nobody was killed. Similar issue in Sydney recently with tragic consequences.

    ‘We are treating this as a murder’: three killed in Sydney boarding house fire.

    Another in Rozelle many years ago killed a mum and bub
    Story behind father who lost his wife and baby when arsonist blew up his home in Rozelle explosion | Daily Mail Online.

    WAY WAY WAY too common.

    Had a client here who was MURDERED by the bank teller in her own home. Had been stealing customer money and client asked questions.
     
  15. Patrick Lim

    Patrick Lim Member

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    Isn't accidental fire a natural disaster? Insurance companies classify them differently to damaged by tenants, and how they pay also different
     
  16. Patrick Lim

    Patrick Lim Member

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    If I understand this legal document correctly: https://www.ato.gov.au/law/view/document?src=hs&pit=99991231235958&arc=false&start=1&pageSize=10&total=1&num=0&docid=NEM/SM201921/NAT/ATO/00003&dc=false&stype=find&tm=and-basic-Section 26-102(6)(c) 1997 ITAA

    Isn't that mean fire, is a valid exemption where I can claim costs prior to rebuilding? Such as interest, demolition, landscaping, etc.

    I'm not clear however if I have to pay them all back if I changed my mind and moved in to the new property as PPOR.
     
  17. Patrick Lim

    Patrick Lim Member

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    Sorry Paul, your message is too mind-blowing for me :)
    Could you please explain what 'scrapping' means? Is that written-off?
    I did do QS depreciation report before the fire. Do you mean then the difference between insurance proceed and the total claimable depreciative items, as equal to CGT profit/loss?

    I was somehow led to believe from Julie's article that the CGT is calculated using cost base of the house, but that formula she has is a bit unclear as to the value of before the fire, or when I purchased the property.
     
  18. Patrick Lim

    Patrick Lim Member

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    I presumed this is impossible?
     
  19. The Y-man

    The Y-man Moderator Staff Member

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    Miracles may happen..... :D

    The Y-man
     
  20. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I would consider it in your best interests to get personal tax advice and not go further with self exploring a solution.
    That is all 100% incorrect. There is NO CGT event so no CGT issue here other than how a gain / loss may be calculated later. Insufficient info.
     
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