Selling IP - Accounting questions

[aw1]

Hi All

I'm looking at selling an IP in the next few months and have a couple of questions.

1. A potential buyer is my tenant. She has indicated she would want the place recarpeted and repainted - both are definitely due. If I were to do this, if I understand correctly this is not immediately tax deductible and must be depreciated. If I then go to sell it can I add these items to the cost base for CGT calculation? I also replaced all the airconditioners earlier this year - can I also add these to the cost base? If it runs into next financial year, do I depreciate the aircons for this FY and add the remaining opening value for next FY to the cost base?

2. Are break fees on a fixed rate loan a tax deduction or do they also have to be added to the cost base? If tax deductible, is it based on the contract date or the actual sale/transfer date?

3. There were some costs that are only deductible over 5 years. As I'd be selling at around the 2 year mark.. am I able to bring these forward as deductions, or add them to the cost base, or do I miss out altogether?

Thanks
Adam

 

[TheDoctor]

Hi Aw1, I will answer these questions as best as possible.

1. A potential buyer is my tenant. She has indicated she would want the place recarpeted and repainted - both are definitely due. If I were to do this, if I understand correctly this is not immediately tax deductible and must be depreciated. If I then go to sell it can I add these items to the cost base for CGT calculation?

If the repaint can be classified as a repair, it will be tax deductible in the year of the cost. The carpet would be depreciated.

When selling the property, you have to apportion your sale proceeds between the land & buildings and any depreciable assets. Effectively you have sold these assets for their Written Down Value (WDV), some people call these the "carried forward amount". You would then take the amount you sold them for away from any consideration you received from the sale.

This essentially has the same affect as adding the WDV to the cost base as you're reducing your capital gain by those amounts.

Please be careful when you sell the property part way through a tax year. Depreciable assets are depreciated on a DAILY basis. A basic example being if you sold it on the 31 December, you would need to calculate depreciation for half the year before selling them.

I also replaced all the airconditioners earlier this year - can I also add these to the cost base? If it runs into next financial year, do I depreciate the aircons for this FY and add the remaining opening value for next FY to the cost base?

You depreciate this up until you cease to rent out the property (which I hope is when you sell it i.e. no time just sitting there). Then do as above.

2. Are break fees on a fixed rate loan a tax deduction or do they also have to be added to the cost base? If tax deductible, is it based on the contract date or the actual sale/transfer date?

I'm not 100% sure of this one. Will have to get back to you but I believe they would be deductible.

3. There were some costs that are only deductible over 5 years. As I'd be selling at around the 2 year mark.. am I able to bring these forward as deductions, or add them to the cost base, or do I miss out altogether?

Those costs you are talking about are deductible over 5 years or the life of the loan, whichever is the smaller. As you will be paying out the loan, you are effectively ending the life of the loan. This means you can bring forward the remaining undeducted amount.

________________________________________

I hope that helps.

P.S. Does anyone else find it difficult to type a lengthy answer in such a small space?

 

[Rob G.]

Hi All

I'm looking at selling an IP in the next few months and have a couple of questions.

1. A potential buyer is my tenant. She has indicated she would want the place recarpeted and repainted - both are definitely due. If I were to do this, if I understand correctly this is not immediately tax deductible and must be depreciated. If I then go to sell it can I add these items to the cost base for CGT calculation? I also replaced all the airconditioners earlier this year - can I also add these to the cost base? If it runs into next financial year, do I depreciate the aircons for this FY and add the remaining opening value for next FY to the cost base?

Sounds like all expenses for the cost base of an asset.

"Repairs" wholly to get a better price for sale of your asset are a capital cost. A case on where repairs were incurred *after* the property was available for rent and immediately before being offered for sale. (12 TBRD Case M2). Even though you have an existing tenant, note a dominant purpose ... add to cost base of property.

New depreciating assets such as hot water system & carpets will be reconciled when sold. *HOWEVER* you might argue that they are CGT assets since they are not installed and ready for use in earning your assessable income. Don't foget that scrapping the old assets is a balancing event.



2. Are break fees on a fixed rate loan a tax deduction or do they also have to be added to the cost base? If tax deductible, is it based on the contract date or the actual sale/transfer date?

Yep ... even when discharging a mortgage.

3. There were some costs that are only deductible over 5 years. As I'd be selling at around the 2 year mark.. am I able to bring these forward as deductions, or add them to the cost base, or do I miss out altogether?

As per Doctor, if they relate to loan establishment costs, LMI etc. then claim the rest in full if repaid/discharged early.

Thanks
Adam

Cheers,

Rob