CGT - Property value when 1st rented...what's that got to do with anything?

[Kath Russell]

Hello. Long time no see.

A property that first brought me to Somersoft a few years ago is now going to be sold and I just need a bit of help before the Accountant gets back to me. I'm impatient, anxious & excited since they produced an amazing tax return and hope they give me a future prediction of zero for CGT. Dreamin'?!

They're getting back to me tomorrow, but can anyone please tell me why the Accountant would ask me for this information : Did you obtain a market value report of the property at the time it first became available for rent?

Yes I did.

$350K Purchase price FY06. Lived in say 2 years then rented out from FY08.
$625K Bank val to refinance then rented out FY08 to now
$550-600K+ current val (not bank val)
$15K Approx purchase costs
$20K approx reno costs before renting out
$50K depreciation claimed since FY08

I know there's fine details like what our incomes are, capital losses to carry fwd etc, but I can work that bit out (approx). I'd just like to know really why they'd ask for the val and which way costs, depreciation are added back / taken off the cost base.

We purchased our new PPOR in July, 2012, settled Sept, 2012 so have missed the 6 month cross over where it's confirmed no CGT but we didn't even know about that rule until last month. Wish I knew before then I wouldn't be asking this question!

Thank you!

 

[Terry_w]

Kath,

probably they are asking because of this rule
http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.192.html

You are taken to have * acquired the * dwelling or your * ownership interest at the income time for its * market value at the time you moved out.

Did you have another residence at the time you moved out or did you rent? The 6 year rule may apply.

 

[Kath Russell]

.....and to think I'd already done my own head in with analysis paralysis with research and you give me that link!

I usually think I'm a bit clever with this property stuff, but I don't actually understand that sentence! :

(2) You are taken to have * acquired the * dwelling or your * ownership interest at the income time for its * market value at that time.

So, does that mean, when we work out the cost base, we use the value of the property at the time we first rented it out ($625K), not the value of the house when we first bought it ($350K)?

Thanks Terry. I appreciate your speedy reply.

 

[Kath Russell]

To answer your question - no, we had company accommodation supplied or rented until buying our PPOR in Sept, 2012.

 

[Terry_w]

So, does that mean, when we work out the cost base, we use the value of the property at the time we first rented it out ($625K), not the value of the house when we first bought it ($350K)?

Thanks Terry. I appreciate your speedy reply.

Yes. You will taken to have purchased it at the date it was first rented out.

But if you moved out and rented elsewhere then you were not claiming another main residence then it may be totally exempt under s118-145 = 6 year rule. check with your accountant and make sure he is aware of this.

 

[Kath Russell]

I'm dying to know now!!!!! Thank you Terry.

Yes, I give every little detail to our Accountant.

 

[Kath Russell]

Should have a capital loss

Heard from the accountant and we should have a capital loss.

However, the last bank val was done in December, 2007 and then rented out in June, 2008.

Does anyone know if there's a time limit as to how old the ATO will accept a bank val? That would be 6 months old but at the time the market there was exploding. It feels like we bought the house and a week later is doubled it's value.

If we can't use the bank val I'm going to have the use the cost base on the original purchase price :

If you haven’t got the market value, so you can use the cost base at the time of purchase and the capital gain will be pro-rata for the period becoming an investment property.

How is that calculated? I've emailed the accountant that information as well.

Thanks!

 

[Terry_w]

It might be worth employing a valuer and letting him/her know why you want it valued. The should be able to value as at the relevant date too.

 

[Kath Russell]

We've decided the valuation plus a letter from the bank manager will suffice at this stage. They'll be held on file in the case where the ATO don't like the accountants CGT calculation. The val is dated about 7 months prior to renting out the house so it's a bit tight (especially with the val actually stating it would only be valid for 3-6 months) but I'm very confident even if we needed another valuation back dated / written to prove values as at the time the market was literally exploding. The mortgage is through the bank in the town where the house is, same manager for years who knows us etc.

One thing the accountant did say after realising we'll probably not pay any CGT is when we pay out the loans we might be hit with a fee for paying it out early. Forgot about that. Sort one thing out and up pops another!

 

[Terry_w]

Not sure what the purpose of a letter is - especially from a non valuer??? The law clearly states "market value" at the time you move out. Do you have a copy of this valuation?

You might be doing yourself a dis-service. Valuations often vary by $10k or so. a $10k lower valuation may result in $10k less capital gain or $10k bigger capital loss. How much extra tax would this save?

On the other hand the valuation may come in more... I suggest for the sake of $400 you get a valuation done as of the date you moved out and let the valuer know the purpose you are requesting it.

 

[Aaron_C]

Get a broker to order the valuation for you, for free. Done.

 

[GaryT]

There is a much more interesting question here that may be being overlooked.

The house was obviously a PPOR whilst lived in, and the house may also be nominated as a PPOR whist subsequently rented for upto 6 years. If the later option is chosen then CGT does not come into the discussion. A PPOR is CGT free.

However, is it compulsory for the house to nominated as a PPOR once vacated by the owner? If not then as in this case a capital loss may be taken advantage of.

I am sure that the ATO would argue that there is no option however looking at the legislation it seems difficult to sustain that opinion.

The absence rule, section 118-145 gives you a choice to cover the house as your PPOR after you move out but does not force you to (regardless of whether you have another PPOR or not).

Having said all of that it is a bit difficult to see how your accountant is projecting any substantial capital loss. Remember that the purchase costs and the renovation costs are not included in the cost base because the cost base is reset to the market value at the time of first renting out. There is also the issue of adding back the building write off and adjusting for the depreciation.

 

[Terry_w]

Good point Gary. I considered this the other day and looked at the section and it says "you may choose to" to continue to treat the residence as your main residence even while absent.

 

[Rob G.]

Just on a point of law ...

s.118-145 is a choice (s.118-145).

It is evidenced by the way you file your tax return (see example to s.118-145(4).

Part IVA would not usually apply to the making of a choice or election unless it was a contrived scenario to utilise the election (s.177C(2) ITAA36).

However, s.118-192(2) deems your cost base and reduced cost base to be market value at the time you first use it for income if all other conditions are fulfilled. There is no choice.

Cheers,

Rob