Value of land for CGT

Question

My husband and I purchased property July 2000, merely realising an asset in 2004 when land use was changed to R30, we built 2 units at the rear of the block. Building commenced July 2006. Rented out June 07. These were on one title until Sept 11. Due to my husbands ill health we now need to sell these properties. Could you please shed some light on how the land and units would be valued for CGT. Thanks Christine Reid

Answer

Just to clarify I am picturing a property with the original house at the front and two new units down the back. The units down the back were rented out immediately ( or at least listed for rent ie not used for private purposes) from the time they were completed in June 2007 ie it took them 11 months to be built. The house at the front was rented out in Sept 2007 when you moved out and has been rented out since then. Sept 2011 you subdivided and created three titles which you will sell separately.
You have 3 separate assets and the main residence exemption can only apply to one, the old house. Even though the land under the units was once covered by your main residence exemption that is all lost retrospectively once you sell it separate from the dwelling that was your main residence.

You need (preferably to get a valuer to) apportion the original price you paid for the property between the old house and the two vacant blocks of land. The valuer needs to take into account that the house was a lot newer then but that it may not have had some renovations you did. You need to help the valuer picture the property when you purchased it.

Section 110-25(4) will allow you to increase this basic cost base by all the costs associated with holding the property that were not otherwise claimed as a tax deduction. For example you may apportion the rates and interest even before the units were built into the cost base of the new blocks of land. Repairs and maintenance is another example and you are certainly not limited to this. Maintenance would even include lawn mowing fuel. Anything to do with holding the property.

The cost of the subdivision would be split 3 ways as it is the cost of producing 3 separate titles but the cost of connecting the water to the back blocks would only apply to them etc. Obviously the building cost of the units would also be included in their cost base as would their individual selling costs. There will be building depreciation that you have to decrease the cost base by too.

Now the cost base of the old house is quite different because it was your main residence for the first 7 years. In Sept 2007 when you first rented it out (assuming that up until that point in time it had not in any way been used to produce income ie speedway was a hobby) the cost base for it would be reset to the market value at Sept 2007 so again you will need a valuer but you are only looking at the old house and its piece of land. You then take this value and add anything from that date that you have spent on it that has not been claimed as a tax deduction. You reduce the cost base by any building depreciation that you were entitled to claim while it was rented. Add selling costs. Its 1/3rd share of the subdivision costs are not included because they happened before Sept 2007.

Now because you were not covering another place in Qld or Perth with your main residence exemption section 118-145 ITAA 1997 allows you to continue to cover the old house and its block with your main residence exemption for up to 6 years. Accordingly, the gain you calculate will be apportioned between the number of days not covered by your main residence exemption and the number of days covered (since Sept 07). CGT not being applicable to the latter.


Note all properties will need to have their figures adjusted for plant and equipment as these are not subject to CGT but it is a minor issue that your Accountant will work out for you.

For the units take their individual costs bases add in the selling costs and deduct them from the selling price. If it is a loss then you cannot use section 110-25(4) to create a capital loss to carry forward or offset against gains on the other properties. If the property was owned in joint names split it between you. If it is a gain then reduce it by any carried forward capital losses you may have in your individual tax returns then deduct the 50% CGT discount and what is left is what you will pay tax on at your marginal rate.

Similar with the old house but before you start the above remove the portion of the gain that is exempt under your main residence exemption.

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