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Valuation for CGT?

Discussion in 'Accounting & Tax' started by 65fbk, 4th Nov, 2015.

  1. 65fbk

    65fbk New Member

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    I am soon to be moving out of my PPOR of about 17 years and turning it into an IP.

    I'm aware of the 6 year rule, but it's unlikely I will return to live at this property.

    I also don't see any reason to sell this property at any time in the future, but in case things change I wanted to ask about getting a valuation now, and if it can be used as a 'peg in the sand' for CGT calcs if I do sell it in the future?

    Can a current valuation from a qualified and licensed valuer be used when calculating the cost base for GST purposes if I was to sell in the future?

    MANY thanks,
    Ben.
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    yes.
    And don't forget to keep records of all interest, rates, insurances etc as these can be used to reduce CGT in the future.
     
  3. neK

    neK Well-Known Member

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    I was always under the impression that you couldn't use a valuation to determine the cost base of a property when changing it from a PPR to IP... or is it the other way around?
     
  4. 65fbk

    65fbk New Member

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    Thanks Terry. Are you able to expand on this? Obviously I will be claiming these expenses during the period it is rented, so including them in the cost base at time of sale seems akin to double dipping...
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No double dipping allowed, but the expenses while it was a main residence can be claimed. I think I have written a tax tip about this.
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Other way around. When rented first it is done on a time basis.
     
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  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  8. 65fbk

    65fbk New Member

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    Wow, thanks Terry I didn't know that one!
    17 years of expenses would be significant!
     
  9. Davothegreat

    Davothegreat Well-Known Member

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    While on the topic of valuations for CGT, I'm interested to know how this hypothetical scenario would play out for CGT...

    1. Purchase an established IP with existing tenancies in place for 500k that's really worth 1M.
    2. On day 1 of ownership you order a bank valuation that comes in at 1M to confirm the property's real value (if you could obtain the bank valuation done during settlement then I guess this would suffice provided that valuation also says 1M and not just the purchase price).
    3. You sell the IP for 1M.

    Would this be perceived to be a capital gain of 500k or a capital gain of $0?
     
  10. wogitalia

    wogitalia Well-Known Member

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    Terry has nailed the above as usual.

    Basically if the 6 year rule runs out or you elect not to use it (say you have a new main residence) then you are treated as having acquired the property at the date it first started to earn income, so great idea to get a couple of valuations done at this point and record them.

    You can also reset the 6 year rule by moving back in, in case you were unaware, but you make it seem like this is an unlikely scenario with the information provided.

    You will have acquired the asset at 500k and disposed at 1m. Assuming no holding costs or anything else you've made a gain of $500k.

    Valuations setting a cost base are pretty rare and generally relate to an exemption either starting or ceasing to apply (main residence, pre-CGT, estates and the like). In this case you've just made a good investment and bought an undervalued asset and have then sold it for a capital gain.

    I've actually seen similar to what you've said, we had a client who bought a property for ~3.2m and on the same day received an offer of ~3.8m (numbers are a bit hazy) and decided to sell it as a result. Settlement and real estate agents must have been dreaming it was that easy for them and our client wasn't too unhappy with making 600k in 12 hours but yeah (was bought as an investment so no emotional attachment)... he paid tax on that gain and obviously didn't get the discount or anything either.
     
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  11. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Hold on. If the property was a PPOR and becomes a IP then the market value at that time applies it becomes income producing and it is the line in the sand. You cant then add CGT costs before that date.. The total of the elements of the cost base IS the market value. s118-192 "The Special Rule".

    You cant double dip and use the MV and also throw in 15 years of CGT/ownership costs. Any ownership+holding etc costs AFTER its a IP are ordinarily tax deductible and claimed. If not claimed then yes they add to the cost base.

    This situation wont apply if that special rule isn't satisfied. eg 6 year rule, CGT apportioning due to fact the property was not first a PPOR etc

    Note that a formal valuation is NOT required but a independent opinion/s may assist. (A REA opinion from the PM would be wise+ many of them have a in house reg valuer) A DIY valuation must be supported by a decent weight of evidence AND retained !!! Not just details on a single nearby sale.
     
    Last edited: 4th Nov, 2015
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  12. HD_ACE

    HD_ACE Game-Changer Premium Member

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    Is a rp data valuation report or similar sufficient?

    If you rent it out for longer than the 6 years, do you loose that 6 years as cgt free and revert to cost base at time of first renting it out or do you get a new cost base at the end of the 6 year period?
    Thanks.
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes Paul is right. The cost base would be the valuation at moving out and that would mean costs incurred would be irrelevant. I was thinking of the other way - moving into an IP.
     
  14. dabbler

    dabbler Well-Known Member

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    I was going to say yes, many years ago did this, and the valuer actually valued place from years prior, but better to do it now if you think you wont be back I would say. Also, as said by Terry, keep all relevant docs.
     
  15. Rob G

    Rob G Well-Known Member

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    No, you do not lose the 6 year main residence exemption if it times out.

    Cost base is still market value on the date the dwelling was first used to earn income.

    ATO ID 2003/1113
     
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  16. S0805

    S0805 Well-Known Member

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    That's great. So all the Interests, Repairs, Insurance, LMI(if any) can be added to cost base. I guess we need to deduct the home office claim over the years as well to be precise..
     
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    But not if you moving out and valuing as then the cost base will be the market value at that time.
    If you are moving in to an investment property then these costs could be added to the cost base.
     
  18. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Isnt that all deductible if its a IP ?? In which case its not a cost base element.
     
  19. S0805

    S0805 Well-Known Member

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    I am referring to PPOR as an example:

    scenario: Property has been PPOR throughout. PPOR bought for 100K in 2000 and sold in 2010 for 500K. With this Interest paid between 2000 to 2010, Council rates, Repairs/Maintenance, LMI (if any) is worth 50K. PPOR has also been used as
    Home office for 5K (which is claimed in income tax). what will be the CGT calculation?

    500K- 150K(100K+50K) +5K = 355K. Property held more than 12 months so 50% disocunt 345K*50% = 177.5K. 177.5K will be added to income year.

    Note: Property has never been IP.
     
  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Office portion may be taxed as a capital gain. Less cost base - which I think would only be the portion of costs associated with the office