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Re: Capital Gains Tax

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My wife and I purchased a property in 1987 and we lived in it as our principal place of residence until 2010 when we rented it out and it still is rented.

Apparently, we should have had the property formally valued in 2010 for capital gains purposes to calculate the capital gain between the time the property was first rented and when it is eventually sold.

I understand that in the absence of a 2010 valuation, the capital gain is calculated over the entire period of ownership less the number of days it was our principal place of residence.

Is it acceptable to the ATO for me to engage a valuer now to estimate the 2010 value of the property for capital gains tax purposes? I have not been able to locate anything on the ATO website concerning this scenario.  

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Hi @SandyE

 

Thanks for getting in touch!

 

Yes, it's acceptable to engage a valuer for your situation. In this context there's no requirement to obtain a valuation at a particular time. In your circumstances, when you sell the property, you will need to undertake a capital gains tax calculation. In undertaking that calculation you'll need to establish the market value of the property at the time it was first used to produce income.  When the ‘first use to produce income’ main residence rule applies, the CGT cost base becomes its market value at this time, and your ownership period for CGT purposes is treated as starting from when you first used the home to produce income. This outcome does not depend on whether or not you have obtained a valuation.

 

Generally, when you sell a property that you have lived in, a reduction in CGT known as the main-residence exemption can apply. 

 

You can also apply the main residence exemption for time after you have moved out:

 

Where you have rented out the property, you can choose to treat it as your main residence for up to six years since you moved out. 

 

See the below example on how the ‘first used to produce income’ rule is applied on a dwelling used to produce income for more than six years:


Roya purchased an apartment in Australia for $180,000 under a contract that settled on 15 September 1994, and immediately started using the apartment as her main residence.
On 29 September 1996 she moved overseas and rented out the apartment. At that time the market value of the apartment was $220,000.


During the time she was overseas she did not acquire another dwelling. She returned to Australia in July 2017 and sold the apartment for $555,000, under a contract that settled on 29 September 2017. She incurred $15,000 in agent’s and solicitor’s costs.


As Roya rented out the apartment, she can only treat it as her main residence during her absence for a maximum of six years; that is, for the period 29 September 1996 to 29 September 2002.


Roya must treat the apartment as having been acquired on 29 September 1996 at the market value at that time, which was $220,000.


Roya works out her assessable capital gain as follows: Capital proceeds − Cost base = Total capital gain That is: $555,000 − ($220,000 + $15,000) = $320,000
Then: Non-main residence days 5,479 (30 September 2002 to 29 September 2017) Ownership period days 7,671 (29 September 1996 (new deemed acquisition date) to 29 September 2017)


$320,000 × (5,479 days ÷ 7.671 days) = $228,559 Roya chooses to use the discount method and, because she has no other capital gains or capital losses, she includes a net capital gain of $114,280 ($228,559 × 50%) on her 2018 tax return.”

 

Hope this helps, JodieH. 

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Did you own any other properties from 2010 until now?

 

Yes, you can engage somebody to give you a market value of your property when you first rented it out.

 

Make sure that you consult with somebody regarding calculating your 'cost base' as there are a lot of items that can be included into it reducing the capital gain.

 

 

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Yes, we have owned other properties since 2010. Thanks for your response concerning getting a back dated valuation. A tax agent had told me that it was too late now to do this because the ATO would not accept a back dated valuation. 

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Hi @SandyE

 

Thanks for getting in touch!

 

Yes, it's acceptable to engage a valuer for your situation. In this context there's no requirement to obtain a valuation at a particular time. In your circumstances, when you sell the property, you will need to undertake a capital gains tax calculation. In undertaking that calculation you'll need to establish the market value of the property at the time it was first used to produce income.  When the ‘first use to produce income’ main residence rule applies, the CGT cost base becomes its market value at this time, and your ownership period for CGT purposes is treated as starting from when you first used the home to produce income. This outcome does not depend on whether or not you have obtained a valuation.

 

Generally, when you sell a property that you have lived in, a reduction in CGT known as the main-residence exemption can apply. 

 

You can also apply the main residence exemption for time after you have moved out:

 

Where you have rented out the property, you can choose to treat it as your main residence for up to six years since you moved out. 

 

See the below example on how the ‘first used to produce income’ rule is applied on a dwelling used to produce income for more than six years:


Roya purchased an apartment in Australia for $180,000 under a contract that settled on 15 September 1994, and immediately started using the apartment as her main residence.
On 29 September 1996 she moved overseas and rented out the apartment. At that time the market value of the apartment was $220,000.


During the time she was overseas she did not acquire another dwelling. She returned to Australia in July 2017 and sold the apartment for $555,000, under a contract that settled on 29 September 2017. She incurred $15,000 in agent’s and solicitor’s costs.


As Roya rented out the apartment, she can only treat it as her main residence during her absence for a maximum of six years; that is, for the period 29 September 1996 to 29 September 2002.


Roya must treat the apartment as having been acquired on 29 September 1996 at the market value at that time, which was $220,000.


Roya works out her assessable capital gain as follows: Capital proceeds − Cost base = Total capital gain That is: $555,000 − ($220,000 + $15,000) = $320,000
Then: Non-main residence days 5,479 (30 September 2002 to 29 September 2017) Ownership period days 7,671 (29 September 1996 (new deemed acquisition date) to 29 September 2017)


$320,000 × (5,479 days ÷ 7.671 days) = $228,559 Roya chooses to use the discount method and, because she has no other capital gains or capital losses, she includes a net capital gain of $114,280 ($228,559 × 50%) on her 2018 tax return.”

 

Hope this helps, JodieH. 

Initiate

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Thanks very much, JodieH, for your informative response.

 

Do I have to lodge the valuation (as at the date it was first used to produce income) with the ATO now or is it only required for proof when the property is sold?

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Hi SandyE,

 

Thanks for the follow up question!

 

You're not required to lodge the valuation with us. If you sell the property and calculate the capital gain or loss arising from the sale, you're required to keep any records showing how you calculated this amount. This will include any valuation that that has been obtained.

 

Thanks, JodieH.

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