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CLARIFICATION OF COST OF CGT ON PROPERTY SOLD
I have had conflicting information from two different accountants re the sale of a property. Below I have outlined details.
This property belonged to my mother-in-law and when she passed in 2002 it was left to my husband in her Will.
Valuation Years
- Property built 1985
- $118,000 2002-2004 Mother-in-law passed (7/6/2002) – Unit Vacant
- 2005-2007 Rented
- 2008 Unit vacant – moved over repairs to home residence
- 2009-2012 Property B&B
- 2013 Vacant repairs to unit
- 2014-2023 Rented
- $385,000 2019 Valuation
- 2021 Husband passed 17/7/2021 and left property in his Will to wife
- 2022 Sold Property 15/11/22 ($500,000)
The property sold for $500,000 and my accountant calculated GST as follows:
$500,000 – $118,000 = $382,000 divided by 2 = $191,000. GST calculated on this amount.
I enquired with another accountant and his calculation was quite different. He has calculated the GST from when the property was placed in my name December 2022. Current valuation $385,000 – $500,000 = $115,000 divided by 2 = $57,500. GST calculated on this amount.
Would you please be able to provide some clarification on this issue as there is a substantial amount of difference on GST that has to be paid.
Additional Questions
I gather when you say GST you really mean CGT
Did your mother in law ever live in the unit before she died
What date did she acquire the unit?
When she first purchased the unit was that in joint tenants with someone? If so when did they die?
Did your late husband ever live in the unit? Because that is the only way the second Accountant is likely to be right
Answers to Additional Questions
Oh dear I do mean CGT.
MOTHER-in-law lived in unit 1985 until her death in 2002
1985 the unit was built for her which is behind my property.
The unit was built for her as she was a widow. As stated above the unit is directly behind my property.
2008 my late husband and I moved across and lived in the unit whilst refurbishing our home.
2013 unit vacant as we were updating it for rental.
Answer
Ok assuming separate title in your Mother in Laws name.
As it was her home at DOD your husband inherited it with a cost base of market value in 2002 – section 128-15 ITAA 1997 $118k This is the first element of the cost base for the CGT calculation.
If I read your dates correctly the unit was rented continuously for the last 13 years of your husband’s life.
On this basis even though he had lived there on occasion it cannot be covered by him main residence exemption at date of death because it had been more than 6 years since he lived there. Accordingly, you have inherited his CGT bill. You stand completely in his shoes, are considered to have used the property the same way he used it. So the CGT calculation would look something like this:
2002 Market Value with adjustment for plant and equipment
Plus improvement costs but not repairs that you claimed a tax deduction for since 2002
Less building depreciation claimed as a tax deduction
Plus holding costs that were not otherwise claimable as a tax deduction including costs while you were living there. Reference section 110-25(4) ITAA 1997
Plus selling costs and legals
This is the cost base that you deduct from the selling price to get the gross capital gain.
This gain can then be apportioned between days covered by your main residence exemption ie 2008 vs days not to work out the percentage of the gain that is taxable. The catch is if you cover this unit with your main residence exemption for any period, you will not be entitled to cover the home you are living in. This may well come back to bite when you sell your family home. Though if your heirs sell the family home after you die they will not have to pay any CGT if it is covered by you main residence exemption just at DOD. They will get the reset to market value at DOD under section 128-15 ITAA 1997. All of the previous exposed time is forgotten. So it is a matter for your crystal ball which is the best option. You won’t be able to cover all the gain on the unit with your main residents exemption just around 6 to 7 years from 2008. That is section 118-145 ITAA 1997 that allows you to continue to cover a previous main residence with your exemption for up to 6 years while it is being rented out. BTW a couple only get one main residence exemption between them.
So in using your example roughly. I think you are saying that the unit was worth $118,000 when your mother in law died.
$118,000 plus holding, selling costs and adjustments say $200,000 = $300,000 capital gain. Then 50% CGT discount so $150,000 taxable. Your Accountant is on the right track just need to look a little closer for items that could be included in the cost base.
Using the example above if you said that 20% of the time it was covered with your main residence exemption (giving up that period on your family home) then $120,000 taxable
The Protecting Your Home from CGT Spreadsheet will help you document your holding costs and experiment with the CGT estimator to consider period you might want to cover with your main residence exemption.
A bit more about holding costs – section 110-25(4). This allows you to increase the cost base by expenses relating to the property that have not otherwise been claimed as a tax deduction. Probably most of these were claimed when it was rented but think about rates, insurance, repairs and maintenance (even includes cleaning materials and lawn mowing) while you were living there or when it was vacant. If you do consider exposing your home to CGT and cover the unit for 6 to 7 years then keep this spreadsheet on your home too. There will be a tonne of stuff that can increase the cost base during the whole time you lived there because nothing would have been claimed as a tax deduction.
