Steve purchased a new apartment (from off the plan) for $350k which he lived in for five years. This was his first and only home.
At the end of the fifth year, the auction price was $450k. He did not sell it, as he wanted at least $480k (the property market was booming at the time).
Since this was his first and only home, he wasn’t liable for CGT had he sold it at that time.
Steve then bought a 2nd property which he lived in. While he was waiting for the first house to be sold, he decided to rent it out while waiting for a good price.
After 12 months of rental income (about $20k), he got $420k for the apartment.
His accountant tells him he has to pay CGT at a prorata rate, ie. CGT of 1/6 of $420k-$350.
Steve thinks this is not fair as the rental income wasn’t much, he didn’t claim any tax benefit for the interest in the first five years, he didn’t claim depreciation, and he didn’t claim any expenses in the initial purchase (stamp duty, legal, etc.)
Steve, in fact, believes he made a capital loss of $30k ($450k-420k) by keeping it for another 12 months and now has to pay CGT as well.
Steve needs to know if this is correct?
Let’s see what the position is.
I’ll have to assume the following.
- Steve borrowed 80% of $350,000 = $280,000.
- Stamp duty on the purchase = $15,000.
- Settlement agent’s costs on the purchase = $1,000.
- Average annual interest rate of 7.5% means $21,000 a year in interest costs.
- Council rates, water rates, insurance & maintenance amounted to $2000 per year.
- No improvements were made to the property.
- No valuation of the property was obtained when Steve began renting the property.
- Steve has claimed negative gearing in his tax returns.
- Estate agent’s commission on the sale = 3% of $420,000.
- Settlement agent’s costs on the sale = $1,000.
Taking these assumptions into account, the picture is as follows.
COST BASE OF PROPERTY
| Purchase price | $350,000 |
| Stamp duty | $15,000 |
| Settlement agent’s costs on the purchase | $1,000 |
| Interest for 5 years | $105,000 |
| Council rates, water rates, insurance & maintenance for 5 years |
$10,000
|
| TOTAL COST | $481,000 |
NET PROCEEDS OF THE SALE OF THE PROPERTY
| Selling price | $420,000 |
| Deduct : Estate agent’s commission | $12,600 |
| Deduct : Settlement agent’s costs on the sale | $1,000 |
| NET PROCEEDS | $406,400 |
So, in fact, a Capital Loss in the amount of $74,600 has been incurred.
Steve can claim 1/6 of the loss ($12,433) in his tax return. It must be noted this capital loss can only be utilised against future capital gains/profits. It cannot be deducted from other assessable and taxable income.
I suggest Steve fires his accountant and enlists Taxwise Australia to handle his tax & other financial affairs in the future.
About The Author
Warren Kruger is an Australian Tax Specialist and Advisor.
For a FREE Report "7 Essential Strategies to Reduce Your Taxation NOW!",
Sign Up RIGHT NOW in the Opt In Box located on the top right hand side of this article.
Similar Posts:
- Tax Smart Investing – Property investors, home buyers and sellers
- Capital Gains Tax – Parents Owning 50% of Children’s Primary Residence
- TAX-SMART INVESTING – SHARES
- Everything You Ever Need To Know About Capital Gains Tax – Episode 3
- Capital Gains on Australian Investment Property
Warren Kruger is an Australian Tax Specialist and Advisor. For a FREE Report “7 Essential Strategies to Reduce Your Taxation NOW!”,enter your name and email address in the Opt In Box located on the top right hand side of this article.
Comments on this entry are closed.