– I purchased an investment property in Jan 2012 for $576K with an interest only Loan(A) of approx. 530K with a plan to develop 2 or 3 units and sub divide for investment purposes
– It has been rented out 100% of the time up until it was demolished in June 2014
– I am currently building 3 townhouses/units. My circumstances have change (we had a baby) and now intend on living in unit 3 with my family and renting out unit 1 & 2 for an extended period of time
– I took out another interest only Loan(B) for $205K to fund the construction.
– Unit 1 and 2 are near identical (14 square), unit 3 is slightly larger (17.3 square) all inclusive of garages.
– All loans and titles are in my name only
1. Is there a tax deduction available for the loss of the original home due to demolition? IE: The bricks and mortar, not the cost to demolish. There was never a depreciation schedule prepared.
2. Is any of the interest on loan (A) or (B) tax deductible between the time the house was demolished until the construction is completed?
3. What is an ATO acceptable method to calculate the base cost price of each of the completed houses after subdivision? Can I simply use the council rates valuation for the land at the time of purchase, apportion the value by land ratio and add cost of the construction/subdivision fees?
No deduction is available for the demolition costs of the original home but they do increase the cost base for CGT purposes and there is no reduction in the cost base because the home has been removed. If the home was built after 16th September 1987 there may be some building depreciation you can claim for what value remains on the building before it was destroyed but this may work out to be insignificant. Refer ID 2010/35 and ID 2010/36. in particular you need to look at the whole life of the house and work out when it was claimed as rental property and when it was not. If you know nothing of the history of the house and it is say 35 years old then you can only claim 1.5/35th of the remaining un claimed building depreciation and that would only be 5 years remaining as 40 years in the maximum period. You will also need a depreciation schedule which will be tax deductible but still cost you around $700 and find a quantity surveyor who is prepared to work from diagrams and photos.
Plant and equipment is a lot easier. You are allowed to estimate the value of them yourself ie hot water system, carpet, curtains, stove, dishwasher, range hood, air conditioner etc. Whatever the second hand value of them was when you purchased the property can be written off against the rent received in the year they were scrapped
Steeles case set the precedent that interest is deductible during the construction process if you intend to rent the properties out on completion. The ATO’s rental property guide even states that you can claim this interest right up until the time that you change your mind and decide to live in the house. Remember the onus of proof as to what your intentions are rests with you.
The value of the land at the time of subdivision has no effect on the CGT cost base. You need to go back to the original price you paid and apportion that between the townhouses. If the land size is the same to each townhouse then you can just divide by three, that is assuming there is nothing inherently different about each townhouse’s block ie one has views and the others don’t.
Please note you need to go over this all in more detail with your accountant. Askbantacs is only one question you have asked several so instead of giving you a lot of detail on one question I have given you a summary and references.