Capitol Gains Tax

From: Terry D


Hello All
Yes another lurker comes out of the woodwork.(I can hear Robert already) I have a Capital Gains Tax question but firstly - My partner & myself stumbled into Investment Properties in Dec.1999. We bought our first I.P. Knowing nothing at all about it only that it seemed like a good idea having someone else helping you to pay for it. Over the next 18 mnths I,d heard a bit about negative gearing but nobody I associated with could explain it in detail. About 5mnths ago I was advised to buy Jan,s book "Building Wealth through Investment Property" 8 books later, buying a computer & joining this community I quickly learnt that property investment was agood way for my partner & my self to become financially independent.
The reason for my silence (lurking) is that it is hard to ask questions when you dont know what to ask & even harder to answer other peoples questions not knowing the answers & knowing that there is so many experienced investors here all knowing and willing to share their Knowledge. I have found that it is a great learning experience just reading other people,s questions & answers. I for one even though a silent one am very appreciative of all those who not only post the answers but also those who post the questions.
We have now bought our 2nd I.P. Settlement should go through in a week or two.
Now for my Q.
My partner has a 50% share in a property with her brother in-law. They bought it in 1985. She has never made any money from the unit as her brother in-law & her sister lived there. Now they are divorced and the brother in-law is still living there with his new wife & he wants to buy my partners share.
My question is will she have to pay Capital Gains Tax and if so can someone explain to me both the indexation method & the discount method I have gone back through the posts but cant seem to find any thing on the index method.
Thanks
Terry

"I started out with nothing and I still have most of it"
 
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Reply: 1
From: Sergey Golovin


Terry,

"She has never made any money from the unit..."

Did anyone ever paid rent to each other at all in that arrangement?
If the answer is yes then it is considered to be rental property.
If the answer is no – owner occupy.

Serge.
 
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Reply: 2
From: Rolf Latham


Hi Terry

WAs it settled b4 Sept 20 1985 ?

Cause if it was CGT prob does not apply anyway

Ta


Rolf
 
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Reply: 2.1
From: Dale Gatherum-Goss


Hi Terry!

This is one of those questions where the answers are unfair and unjust, so, please bear with me. . . .

As Rolf asked, what date in 1985 was the house bought? This is crucial to the answer, as if the house was bought before September 19, 1985 then there is no Capital Gains Tax whatsoever.

However, if the house was bought after September 19, 1985 then CGT will apply regardless of whether there is income from that property or not. Sorry Sergey.

Furthermore, the tax office will use the current market value as the disposal price and not any figure that your partner and her brother chooses to use.

Please tread wearily and ask for more information if you like. Otherwise, welcome to the forum and good luck with your investing.

Dale
 
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Reply: 2.1.1
From: Terry D



Hi All
No. No rent at all has ever been paid & my partner has never lived there.
Sorry my mistake. I have just been corrected
The property was purchased in Sep.1986
My partner has agreed to her share of a price we believe to be lower than market value but naturely the brother in-law believes to be around the value. This is not a problem.
How does the Tax office get the true market value? And Dale I dont understand how they can tax you for money you dont receive.
Are you saying if market value was $260000 & my partner excepted $120000 for her share she will be taxed as though she received $130000.
Also what is the difference in the 2 ways of working out CGT.
Thanks
Terry

"I started out with nothing and I still have most of it"
 
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Reply: 2.1.1.1
From: Dale Gatherum-Goss


Hi Terry!

First rule of tax law is that it does not make sense. Second rule of tax law is that it is not logical. . . .

The tax office will accept whatever figures you include in your tax return. However, they reserve the right to challenge those figures in an audit should they so desire.
So, in your example, the tax office would tax your partner on the $130k not the $120k that she actually received.

In cases such as yours, I normally recommend that you ask 3 real estate agents to give you a conservative valuation for what the house is worth. Then, I deduct the normal costs of selling such as real estate commissions since it is a private sale. This leaves me with a conservative valuation that I can place on file should the tax office raise their ugly head in times to come.

Capital Gains Tax is worked out by different formula. The first is to take what the property cost and increase that price by the effect of inflation. Then we do the same thing with stamp duty, legal fees and other such costs. From this figure we deduct the sale price and you pay tax on the profit at your normal marginal tax rate.

The simpler method (not always the better method though) is to ignore inflation and still deduct the cost of the property originally, along with the costs of buying that property from the sale price. Then, 1/2 of the gain is exempt from tax.

Terry, I recommend that you start digging out your papers on this property and getting valuations. There are always ways to reduce, if not eliminate the burden of the tax, and the easiest way is to identify every cent that you have ever spent on that property.

Let me know if you would like more information, I am conscious of making this too long to be useful.

Cheers and good luck

Dale
 
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Reply: 2.1.1.1.1
From: Dale Gatherum-Goss


Me again!

I mentioned in my last post about getting all your paperwork together. This includes things such as rates and interest on a loan that your partner has paid for this property.

One of the rules not always understood is that you can claim these normal "everyday" costs as part of your cost base if you have not yet claimed them on your income tax return.

Perhaps this might help solve your problem and turn a capital gain into a capital loss which has enormous advantages in the future for your partner.

Good luck!

Dale
 
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Reply: 2.1.1.1.2
From: Robert Forward


Hi Terry

To add to Dale's comments.

If there was any renovations done during this period, or capital expenses like a new garage, kitchen, carpet etc this can also help lower any CGT as you will be able to claim at least 50% of the costs and a good accountant may even be able to get a 100% claim.

Cheers
Robert
 
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Reply: 3
From: Terry D


Hi
My Partner paid her 50% upfront & paid all the cost of buying the property leaving the brother in-law to pay off the mortgage as his 50% Even though the mortgage was in both names. Thus some of the paperwork may not be retrievable but we will take that up with him. There hasnt been any renovations done to my knowledge but we will also speak to him about this.Dale We will follow your recommendations.
As to working out which being the most benifical formula for CGT. I dont understand how I go about finding the inflation figure for all those years.
Dale, I will take you up on your offer for more info but I will need sometime to chase up papers etc. I guess we have until the end of the finacal year & than some.
I thank everyone for your help & responses
Terry

"I started out with nothing and I still have most of it'
 
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Reply: 3.1
From: Mark Laszczuk


Peoples,
Just a thought regarding paying CGT on the FMV. The tax office may do this to stop people from 'selling' their properties to a friend or family member for like a dollar or something and then paying CGT on that dollar, or even accruing an enormous capital loss. I can see the advantages here if it was possible. Just a thought. Makes the ruling a little easier to understand.

Mark
'no hat, some cattle'
 
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Reply: 3.1.1
From: Dale Gatherum-Goss


HI Mark

You are absolutely correct on your thoughts. That is exactly why they use market value when people are selling to family, friends and associates.

Well done

Dale
 
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Reply: 3.2
From: Dale Gatherum-Goss


HI Terry!

You are more than welcome. Your accountant should be able to crunch both sets of CGT numbers on your behalf to find which one is the best result. All you need to know is the information that he/she will need to use to get that best result for you.

When you're ready, I'm happy to help in this regard and let you know what likely damage your partner is facing.

Have fun

Dale
 
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