CGT relating to holding costs of the principle place of residence that was rented out for 1st year of ownership

Question

Dear Julia,

My principal place of residence was used as a rental before I lived in it for the 1st year of ownership and I understand it will carry a pro rata CGT liability.
I believe I can claim for any improvements to the property irrespective of when they were carried out and deduct this from the cost base and I was also wondering if I can deduct council rates,B/Corp rates,insurances,interest on the loan,maintanence & repairs to the building for the 8 years I have held the property.
Thanking you in advance for your answer.

Answer

You are correct that you are going to have a pro rata CGT liability. The gain is apportioned after it is fully calculated. This means that expenses during the period you lived there reduce the capital gain for the period you didn’t.
Thanks to section 110-25(4) you can increase the cost base (thus decrease the capital gain) by any ownership costs. These include all that you say ie body corp rates, interest, insurance and repairs. But these items are only listed in the legislation as examples it is not a conclusive list. You can include any costs of ownership. In particular you can have a field day with repairs and maintenance even cleaning materials, lawn mower fuel, light globes. The substantiation rules that apply to work related expenses do not apply to CGT. Nevertheless, a receipt is the best form of evidence. But if you have a reasonable method of estimating some of these costs for which you do not have a receipt the ATO may accept them. The law requires you to keep “records” and even if substantiation did apply the ATO cannot deny you a deduction for an expense it is obvious you would have incurred such as rates.
Note you cannot increase the cost base by expenses that you have otherwise claimed as a tax deduction so the interest, rates, insurance, body corp etc for the year it was rented out cannot be used to increase the cost base.
Improvements during any of the time you owned the property would increase the cost base, even if the benefit of them is no longer present in the property. You will need to decrease the cost base by any building depreciation you claimed in that first year. If you didn’t claim any and do not have a QS report of records of the actual cost of the building or improvements made by previous owners then you don’t have to reduce the cost base. But if say you made an improvement yourself in the first year (so you know the cost) even though you didn’t claim building depreciation you still have to reduce the cost base by the amount you could have claimed.
Section 110-25(4) cannot be used to tip the property over into a capital loss only to reduce the gain to zero if possible.

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