Capital Gains Tax Valuation for Properties

A capital gains tax valuation is required by the Australian Tax Office (ATO) to determine any capital gains you may have realised from the sale of your investment property.

For many tax-related purposes, valuations are necessary. For the purpose of calculating capital gains tax for a property, a valuation is used to determine the cost base. As an investor you can benefit from a higher cost base by doing so. You report less capital gain if your cost base is higher.

Due to all the property jargon used, it can be difficult to understand how to use a capital gains tax property valuation to your advantage.

Capital Gains Tax: What is It?

The difference between the price you paid for a property and the price you received for it when you sold it is referred to as a capital gain or loss.

The ATO states that any profit you make from the sale of your investment property is a capital gain and needs to be reported on your income tax return.

Capital gains tax, or CGT, is the name of the tax you are required to pay on your capital gain.

Tax exemptions on Capital Gains

However, if they fit into one of the CGT exemption and concession categories, the ATO permits property investors to eliminate (or at least drastically decrease) their capital gains tax due.

These consist of:

the exemption for the principal place of residence;
50% discount if you owned the property for at least 12 months before selling it;
the six-year rule;
the 6-month rule.

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What does a property valuation for Capital Gains Tax mean?

Property investors must file a property valuation report to the ATO in order to determine any potential capital gains from the sale of their investment property.

A capital gains tax valuation report is essentially used to determine if the value of your property has increased or decreased in value.

While submitting a CGT valuation report may be required by the ATO, doing it accurately can help you avoid paying more tax than is necessary.

Including all costs associated with acquiring, buying, and selling the property can dramatically raise your cost base and lower the amount of capital gain you must report.

But so many investors pass up on this opportunity to factor in these costs and lower their profit for tax purposes.

A party may not submit a report or introduce the evidence of a different expert on the same issue without the court's approval if only one expert has been designated by the court to prepare a report or provide evidence on it. A party could still be dissatisfied with the valuation, even after asking questions or attending a conference with a single expert. There may still be a significant point of contention, such as whether the single expert employed the appropriate valuation approach.

What Is the Cost Base of a property?

Keep in mind that a capital gain is equal to the difference between the selling price and the cost base.

The cost base of the property consists of the purchase price and expenses less any grants, and depreciation:

Cost base = purchase price plus expenses less (grants plus depreciation)

You will ultimately reduce the capital gains you declare on your yearly income tax return by increasing expenses to your cost base.

Cost-Base expenses

Title costs are the costs related to registering the title to your property with the state or territorial Land Titles Office.
Ownership costs include the costs related to finding and inspecting properties.
Legal fees, stamp tax, and rental advertisement fees are a few examples of incidentals;
Repairs and renovation costs for improvements.

Example:

For $850,000, Mr & Mrs Smith sells their rental (or investment) property to Baljit who is also an investor.

The Smiths initially paid $650,000 for the property. Therefore, if the property was assessed for capital gains tax purposes, it would be clear that they had made a $200,000 capital gain.

However, in order to account for any relevant costs on their cost base, the Smiths order a Capital Gains Tax Valuation from AskTheValuer.

The following costs were included in their cost base based on the Capital Gains Tax Valuation Report from AskTheValuer:

Stamp duty and incidental costs: $25,500

Renovations: $105,00

Title costs: $1,100

Mr & Mrs Smith’s capital gain after deducting these costs is as follows:

Cost base is $600,000 plus ($25,500, $1,100, and $105,000), for a total of $731,600.

$850,000 minus $731,600 equals capital gain of $118,400.

Given that the Smiths had owned the property for longer than a year, $118,400 multiplied by 50% equals $59,200

In order to represent their capital gain, the Smiths only need to disclose $59,200 (instead of $200,000) on their income tax return.

Sometimes a Retrospective Valuation for Capital Gains Tax is required

Refer <Retrospective Valuation>.