Depreciation and Gain calculation

[Nominees]

Hello,

I am not sure I understand this fully. Let me explain myself using an example.

Let say I purchased a new invesment property for $300,000, and depreciate it by $10,000 every year for the next 5 years. I then sell the property for $520,000. How do I calculate the gains I made on the property.

Is it simply the Selling Price - Initial cost = $220,000?

Or do I have to take into account depreciation which will make it $270,000?

Obvioulsy this would mean you would have to pay a bit more CGT. Can someone comment on this please.
Thanks,

Nominees

[Sam_H]

Nominees;

My understanding is that CGT is calculated by:

GCT =the difference between the
purchase price (plus stamp duty, legals etc etc)
and the sale price (less agent fees, legals etc etc)

The fact you are depreciating the bldg has no effect on the CGT calculation

Cheers


Sam

[Richard Hunt]

Nominees,

Generally, if the IP was purchased after May 1997 the 2.5% capital allowance wiill reduce the cost base and result in an increased capital gain of $270K using your example (but don't forget the 50% CGT discount if held for more than 12 months).

IP's purchased prior to May 1997 will not suffer the same fate.

[Nominees]

Hi Richard,

That is what I thought :(

I do not understand why people are not told this, though.

Most of the time "depreciation" is described as a great tax relief but really you have to be careful....

Agreed, I did some sums and most of the time it is worth depreciating a property because of the 50% CGT discount (if held for more than a year.)

[DaleGG]

Hi

The other issues is that $1 of tax deduction today is actually worth more to you than $1 of CG in the future simply because of the buying power of money devaluing over time.

Dale

Originally posted by Nominees
Hi Richard,

That is what I thought :(

I do not understand why people are not told this, though.

Most of the time "depreciation" is described as a great tax relief but really you have to be careful....

Agreed, I did some sums and most of the time it is worth depreciating a property because of the 50% CGT discount (if held for more than a year.)

[INVESTRON]

I M H O

the way i was told is:-

purchase price + costs
+ CPI from time of purchase to time of sale ( index figures available from ATO web site )

the total of these taken away from sale price - costs

then that amount of profit is divided by 2 and that is your amount of taxable capital gain.

if the c p i increase over time is equal to the increase in price - there will be no capital gain.

[WillG]

Hi Richard,

Was the pre/post 1997 CGT rule a part of Mr Costellos Tax Reform ?

[Nominees]

Hi Dale,

Agreed. (No probems there, I would rather have money now then later.)


Investron,

What you say is very interesting. I never thought of it like that. Could you please confirm this Dale. (The bit about CPI, it makes sense come to think about it ...)

Thanks

[DaleGG]

Originally posted by Nominees

What you say is very interesting. I never thought of it like that. Could you please confirm this Dale. (The bit about CPI, it makes sense come to think about it ...)

Thanks

Hi

The CPI increases was abandon in 1999 in a rather stealthy way of gaining more tax from capital gains.

So, the future CPI increases will not help to reduce the tax on capital gains.

Dale

[Richard Hunt]

WillG,

Can't recall the timing of its introduction, although assuming that it was not retropective, the amendment would pre-date the major tax reforms enacted since Sept 99 in response to the Ralph Review.

[Les]

G'day Nominee,

You said -
Most of the time "depreciation" is described as a great tax relief but really you have to be careful....
My thoughts on this is that it IS worth claiming the depreciations upfront as it allows you to leverage into MORE property EARLIER.

I guess this is personal choice, and, yes, some care needs to be taken - but, if embarking on a "career" of property investment, the first 5 years with increased Tax deductions would slingshot an investor into a higher realm far better/quicker than with no deductions.

And, to avoid Capital Gains, just don't sell anything !!!!! ;)

Regards,