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Re: CGT - Real Estate - The 3rd ELEMENT

Newbie

Views 1279

Replies 9

Hi there

 

I have a question about the 3rd element of the cost base of the real estate. The property had been held for 8 years since 2012 and it eas sold this year.  For the first 3 years, the onwer was living in and the property was rented out for the last 5 years. The owner does want to apply the "6 years rule" to mominate this property as main residence for the last 5 years and no valuation was performed at begining of the rent period.

 

According to the information on the ATO website: https://www.ato.gov.au/general/capital-gains-tax/your-home-and-other-real-estate/calculating-the-cos....

 

Under such circumstance, I believe the unclaimed or non-deductible cost during main resident period could be added to cost base when selling the property. The unclaimed cost during owner occupied period : loan interest, rates, building insurance, maintenance cost.

 

Is my understanding correct?

 

Regards

Andy

1 ACCEPTED SOLUTION

Accepted Solutions

Most helpful response

Taxicorn

Replies 0

@Andy77 

 

Makes sense now.

(1) Market Value when first rented out has to be the cost base + selling costs etc (can't include purchase costs)

 

(2) Can't claim any 3rd element costs for the first 3 years as it was not yet a rental. (can only do this once it became available for rent) so if there were periods where it was not available for rent then these can be claimed.

 

(3) Has to subtract any Capital Works deuctions from the cost base that have been claimed or can be claimed.

 

 

9 REPLIES 9

Taxicorn

Replies 8

@Andy77 

 

If they are applying the 6-year absent rule and want to nominate it as their main residence then there will be no Capital Gain or Loss.

 

Third Element costs cannot apply for the first 3 years as it was not a rental.

Third Element cost can only reduce a Capital Gain to $0, they can not create a loss.

 

 

Newbie

Replies 7

@macfanboy 

 

Thank you for kind your reply. There is a missing "NOT" in my question. The correct statement should be 

"The owner does NOT want to apply the "6 years rule" to mominate this property as main residence for the last 5 years".

 

Most helpful response

Taxicorn

Replies 0

@Andy77 

 

Makes sense now.

(1) Market Value when first rented out has to be the cost base + selling costs etc (can't include purchase costs)

 

(2) Can't claim any 3rd element costs for the first 3 years as it was not yet a rental. (can only do this once it became available for rent) so if there were periods where it was not available for rent then these can be claimed.

 

(3) Has to subtract any Capital Works deuctions from the cost base that have been claimed or can be claimed.

 

 

ATO Community Support

Replies 5

Hi @Andy77

 

 

The value of home when first used to produce income speaks to what @macfanboy is referring too. It may be helpful for you also.

Newbie

Replies 4

Hi Mark 

 

Thank you for your kind reply.

 

As the link you provided shows "If you start using your main residence to produce income after 20 August 1996, you're generally taken to have acquired it at the time you first used it for this purpose. This means when you sell the dwelling, you need to work out the capital gain or loss using its market value at the time you first used it to produce income. You don't have a choice."

 

In practice, how do we get the market value in the past? Since in this case, no valuation was performed at  the time the property was first used to produce income.

 

Do we need to have a profesional valuer to get the market value at the time the property was first used to produce income?

Taxicorn

Replies 3

@Andy77 @MarkATO @KylieATO 

 

Yes get a professional valuer as the value will probably be a lot more than a unrelated Real estate agency.

The cost, I beleive, can be either claimed in the year you obtained it ? ----> any help ATO

or if not will be added to your cost base

 

https://www.ato.gov.au/general/capital-gains-tax/in-detail/market-valuations/market-valuation-for-ta...

ATO Community Support

Replies 0

Hi @Andy77,

 

Almost, @macfanboy!

 

Property valuers form part of the Second element of the cost base. You'll need to include it here, rather than an immediate deduction.

 

A good property valuer will be able to ascertain the value of a property at any given time, even if that time has long since passed.

 

They can do so by using historical data of sales in the area using the first two valuation methods for property.

Newbie

Replies 1

Hi @macfanboy @BlakeATO 

 

Thank you for your kind replys.

 

I have one more concern about this question is that I quote the followoing informaiton from ATO website

https://www.ato.gov.au/general/capital-gains-tax/your-home-and-other-real-estate/calculating-the-cos...

 

Costs of owning

When working out the reduced cost base for real estate you do not include:

  • council rates
  • insurance
  • land tax
  • maintenance costs
  • interest on money you borrowed to buy or improve the property.

You include these in the cost base only if:

  • you acquired the property under a contract entered into after 20 August 1991 (or, if you didn't acquire it under a contract, you became the owner after that date), and
  • you couldn't claim a deduction for the costs because you didn't use the property to produce assessable income – for example, it was vacant land, your main residence or a holiday house during the period.

 

How do I interpret the "main residence" above? Under what circustance shall we include the cost of owning into cost base when it is a main residence?

 

If the property is  main residence, I will get CGT exmeption, so I do not need to calculate cost bast at all.

 

Or The property was main residence before it was rented out. As you advised last week, we need to have a valuer to do the valuation and we need to use the value provided by the valuer to calculate CGT. So we do not include the cost of owning for the main residence period  into the cost base too. 

 

 

Regards

Andy

 

 

ATO Community Support

Replies 0

Hi @Andy77,

 

You will need to use the valuer to appraise your property for Market Value (your property's value at the time you first start using it to produce income) They will not work out your capital gains tax for you.

 

If a property is used to produce assessable income the market value and other elements of the cost base will be used when determining cost base.

 

In relation to Subsection 110-25(4) of the ITAA 1997 provides that the third element of the cost base of a CGT asset are the costs of owning the CGT asset. These costs include council rates, interest on loans to acquire the asset and costs of maintaining, repairing or insuring the asset. Ownership costs can only be included in the cost base of a CGT asset where the asset was acquired after 21 August 1991 and the costs are not deductible in the year they were incurred.


However there is a Private Ruling about claiming deductions against a main residence and a disclaimer at the beginning of this same private ruling which states - 'You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest)'.

 

Therefore I would advise anyone wanting clarification for their own scenario to write in to our Early Engagement Team. An individual may also request a Private Ruling for their own circumstances.

 

All the best.