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Tax Tip 26: Claim interest on a main residence against CGT on sale

Discussion in 'Accounting & Tax' started by Terry_w, 23rd Aug, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Claim interest on a main residence against CGT on sale

    Sometimes a property which has been the main residence for only part of the time held will attract CGT when sold. This may be because

    1. You have moved into a rental property, and/or

    2. Your main residence has been rented out, and/or

    3. You have run a business from your main residence.
    Not many know that interest and other costs which have not been otherwise claimed can be used to reduce the CGT when the property is sold. This includes costs incurred while it was a main residence and not income producing.

    See s 110-15(3) ITAA97 The 3rd element of the cost base of a property:

    Element three: Non-capital costs you incur in connection with your ownership of a property which you acquired post 20 August 1991; for example - interest on money borrowed to acquire an asset, costs of maintaining, repairing or insuring the asset, rates and land tax.

    Don’t forget to include any borrowing costs not already claimed - such as LMI which is often a large expense.
     
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  2. chylld

    chylld Well-Known Member

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    2 questions:

    1) Do "other costs" include fixed utility costs? e.g. flat-rate apartment water fees, or electricity service availability charges? (I assume per-unit usage charges aren't included)

    2) Are these costs factored in:
    a) before the 50% CGT discount (which I assume is used when CGT exemption isn't used)?
    b) after apportioning the total capital gain (between buy and sell) by the % of time the property was used as an IP?

    (If I'm not making any sense with 2b, it's because my accountant said that's how the CG is calculated... but they also wanted valuations when they switched from PPOR to IP... not sure how the valuation factors in)
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    1 - costs of maintaining, repairing or insuring the property would be included. Don't think utilities would apply

    2a before
    b before
     
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  4. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Take care - There are many issues that can affect which costs can be included or not included.
    eg
    - If property has been subject to s118-192 at any time
    - Property previously subject to a marital split
    - Residency / Non-residency changes
    - Changes to the site eg : Building a duplex or a dev)
    - On large areas of land : If the land is not adjacent to the main residence perhaps.
    - Adjustments for capital allowances and depreciation previously claimed can alter the cost base

    The whole issue of CGT is very complex and its not uncommon that DIY taxpayers get it wrong...Both under or over. For example I wish I had a dollar for every taxpayer who has c/fwd losses who thinks they can work out the cap gain then halve it ....then deduct the losses.
     
  5. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    1. No. These are not ownership costs
    2. Depends. Not all taxpayers get a discount. There is a precise formula for working out a CGT amount.

    Valuation under s118-192 would preclude any ownership costs before the relevant date. !!
    s118-192 specifically uses the market value at the date a IP first earns income and doesn't give a taxpayer any choice about the cost of the driveway installed the month before as an example.
     
  6. chylld

    chylld Well-Known Member

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    Thanks Paul, CGT's complexity is abundantly clear to me now :) Just trying to get a better understanding of it, but will let my accountants do their usual good work. No CGT event happening for me in the foreseeable future anyway!
     
  7. htopg

    htopg Well-Known Member

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    You could got a dollar from me two years ago.
    Now, you can't ;-)

    Wishful thinking:
    Capital Gain x 0.5 - Carry Forward Loss

    Cruel reality:
    (Capital Gain - Carry Forward Loss) x 0.5
     
  8. Ash107

    Ash107 Member

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    Hi Terry - I'm confused about the CGT issues of selling a ppor which was partially used for business, so here's a hypothetical for you :)

    WorkerBee lived in her ppor for one year, and claimed 30% of her mortgage expenses as a home office expense. In the second year, she still resided in the ppor but did not claim home office expenses. In Year 3, she moved out and rented the ppor out, and claimed 30% of her rental costs as the cost of running her home office.

    4 years after moving out of the ppor, she sells it (in Victoria - using the 6 years exempt rule?) In this case, what will the CGT be, if any?
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Many issues there. Perhaps 30% subject to cgt.
     
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  10. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Home office costs at 30% may be excessive. I would argue its important for any taxpayer who uses their home as a place of business get personal advice before attempting to claim any ownership costs. And then a measurement of the area in use. A home office for a mortgage broker may not give rise to ownership cost deductions and likewise there may be no CGT issue if they partially use their home for work rather than have a full time dedicated use say part of the garage etc....And if the home is used for clients etc this can be far more certain that just a home office etc which is used to do part of the income producing work.

    Running your business from home | Australian Taxation Office also explains that the CGT may need to be adjusted for the time used as a POB, the area and other factors where there may be exemptions. The onus will fall on the taxpayer to include a reasonable amount of cap gain rather than follow a prescribed formula.
     
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  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Paul makes a great point!