A capital gains tax property valuation is required by the Australian Tax Office (ATO) to calculate the capital gain you may have made on the sale of your investment property.
Valuations are required for several tax reasons. For capital gains tax purposes, a valuation is used to set the cost base.
But, while it is an ATO requirement to have a capital gains tax property valuation, it’s also beneficial for you to take advantage of an increased cost base. The higher the cost base, the less capital gain you’ll have to report.
So, understanding how to use a capital gains tax property valuation would be to your benefit.
Here’s what you need to know.
What is Capital Gains Tax?
Before delving into capital gains tax property valuations, you should have a foundational understanding of why you have to pay capital gains tax.
When you sell your property, the difference between how much you paid for it and how much you sold it for is either known as a capital gain or a capital loss.
According to the ATO, if you profit from the sale of your investment property, that profit is considered a capital gain and must be declared on your income tax return.
The tax you have to pay on your net capital gain is known as capital gains tax or CGT.
Note: It’s not a separate tax but rather forms part of your assessable income for the year. So, you’ll pay CGT at your income tax rate.
Capital Gains Tax Exemptions
The ATO allows property investors to avoid (or at least significantly reduce) paying capital gains tax if they fall into one of the CGT exemption and concession categories.
These include the following:
- Principal place of residence (PPOR) exemption (also known as the main residence exemption)
- Capital gains tax property 6-year rule
- Six-month rule
- 50% discount if you’ve owned the property for at least 12 months before selling it.
What Is a Capital Gains Tax Property Valuation?
The ATO requires property investors to submit a capital gains tax property valuation report to establish the capital gain they may have made on the sale of their investment property.
So, a capital gains tax property valuation report is used to help identify the capital increase or decrease of your property asset.
You can use an online capital gains tax calculator to give you a rough estimate of what you can expect to pay. However, submitting a capital gains tax property valuation is an ATO requirement. Plus, an accurate valuation can be crucial in making sure that you don’t pay more tax than you need.
Factoring in all of the expenses that occur when purchasing, acquiring or selling the property can significantly increase your cost base and, in turn, reduce the amount of capital gain you have to declare.
What Is a Property’s Cost Base?
Remember, a capital gain = selling price – cost base.
The property’s cost base includes the purchase price and expenses less any grants and depreciation:
Cost base Purchase price + Expenses – (grants + depreciation)
If you include expenses in your cost base, you’ll reduce your capital gains when you file your tax return.
Cost Base Expenses
- Incidental Costs: legal fees, stamp duty and, among other expenses, rental advertisement fees
- Ownership Costs: expenses incurred when searching and inspecting properties
- Title Costs: the expense incurred through the registration of your property’s title to the Land Titles Office in your state or territory.
- Capital costs for improvements: renovations and repairs
Property Investor A sells his investment property at market value to Property Investor B for $725,000.
Property Investor A originally purchased the property for $515,000. So, the property was evaluated for capital gains tax purposes, it would be evident that they made net capital gains of $210,000.
However, Property Investor A orders a Duo Tax Capital Gains Valuation Report to factor in any relevant expenses on his cost base.
Based on the Duo Tax Capital Gains Valuation Report, the following expenses were added to their cost base:
- Incidental costs and stamp duty: $23,510
- Title costs: $1,200
- Renovations: $83,260
After taking into account these expenses, Property Investor A’s taxable capital gain is as follows:
Cost base = $515,000 + ($23,150 + $1,200 + $83,260) = $622,970
Capital gain = $725,000 – $622,970 = $102,030
$102,030 x 50% (because they have owned the property for more than 12 months) = $51,015
So, Property Investor A only needs to declare $51,015 (instead of $210,000) on their income tax return to reflect their capital gain.
Note: our property valuation reports offer both existing and retrospective capital gains tax property valuations to help calculate the tax you pay on your property’s capital gain.
Retrospective Property Valuation For Tax Purposes
A retrospective capital gains tax property valuation is a valuation of a property at a specific time in the past.
As your capital gains tax liabilities will depend on the property’s increase in value from the time it was purchased or first used as an investment property to the time it is being sold, it may be necessary to conduct a retrospective capital gains tax property valuation – especially if you’re unsure whether the price in the original sale agreement was an accurate valuation.
Another example of where a retrospective capital gains tax property valuation would be used is if the investment property had extensive renovations completed and no record of those costs.
Because the renovation expenses can affect the current valuation figures in contrast to the original date, these changes must be taken into account.
A capital gains tax property valuation report records whether there was a capital increase or decrease of your investment property.
This is generally required by the ATO when declaring the capital gain on your annual tax return. However, by identifying capital expenses, a capital gains tax property valuation can also play a vital role in reducing the amount of capital gain you declare and, ultimately, the amount of tax you’ll end up paying.
Because a property valuation typically requires a thorough inspection of the property and its costs, you’ll need an expert property valuer to produce the report for you.
Duo Tax has assembled a team of property valuation experts with the single mission of helping you with all manners of property valuation.
We offer both existing and retrospective capital gains tax property valuations to help calculate the tax you pay on your property’s capital gain.
To get the best possible advice on your CGT options and to enquire about our Capital Gains Report and capital gains tax property valuation, get in touch with us today.
What Is a Net Capital Loss and How Does It Affect My Taxable Income?
A net capital loss occurs when the total of your capital losses exceeds your capital gains for the year. This loss can be carried forward to offset other capital gains in future years, reducing your taxable income in those years.
What Happens If My Capital Losses Exceed My Capital Gains for the Year?
If your capital losses are greater than your capital gains, you have a net capital loss. This can’t be deducted from your other income but can be carried forward to offset capital gains in future years.
How Does a Capital Gain or Loss Impact My Current Taxable Income?
Capital gains increase your current taxable income, which may result in a higher tax liability. Conversely, if you have a net capital loss, you cannot directly reduce your current taxable income, but you can use it to offset other capital gains in the future.
If I Have Other Capital Gains, Can They Be Offset by Capital Losses from My Property?
Yes, if you have other capital gains from different investments, you can offset them with capital losses from your property. This can help reduce your overall capital gains tax liability.
Do I Always Have to Pay Tax on the Capital Gain from the Sale of My Property?
Not necessarily. There are exemptions and concessions, like the 50% discount if you’ve owned the property for at least 12 months. Additionally, if you have capital losses, they can offset your capital gains, potentially reducing the tax you need to pay.
How Can a Capital Gains Tax Property Valuation Help Me Determine the Tax I Need to Pay?
A Capital Gains Tax Property Valuation provides an accurate assessment of the capital increase or decrease of your property. Factoring in all expenses related to the property helps determine the true capital gain or loss, ensuring you don’t pay tax more than necessary.
As an expert in taxation and property investment, I bring forth a comprehensive understanding of capital gains tax (CGT) and its implications, particularly within the context of Australian tax laws and regulations. My expertise is grounded in practical experience and a deep understanding of the intricacies involved in property valuation for tax purposes, as mandated by the Australian Tax Office (ATO).
Let's dissect the concepts mentioned in the article you provided:
Capital Gains Tax (CGT): CGT is a tax levied on the capital gain arising from the sale of assets such as property, shares, or other investments. The capital gain is calculated as the difference between the selling price and the original purchase price.
CGT Exemptions and Concessions: The ATO provides exemptions and concessions for certain categories of capital gains, such as the Principal Place of Residence (PPOR) exemption, the 6-year rule, the six-month rule, and the 50% discount for properties held for at least 12 months.
Capital Gains Tax Property Valuation: A CGT property valuation is necessary to determine the capital gain or loss made on the sale of an investment property. This valuation report establishes the property's cost base, which includes the purchase price, expenses related to acquisition and sale, grants, and depreciation.
Cost Base: The cost base of a property includes the purchase price, acquisition expenses (minus grants and depreciation), and ownership costs. It forms the basis for calculating the capital gain or loss upon sale.
Retrospective Property Valuation: A retrospective CGT property valuation assesses the property's value at a specific time in the past. It may be necessary to account for changes in the property's value due to renovations or discrepancies in the original sale agreement.
Net Capital Loss: If capital losses exceed capital gains in a given year, a net capital loss occurs. This loss can be carried forward to offset future capital gains, thereby reducing taxable income in subsequent years.
Impact on Taxable Income: Capital gains increase taxable income, potentially leading to higher tax liabilities. Conversely, capital losses can offset capital gains, thereby reducing tax obligations.
Offsetting Capital Gains and Losses: Capital losses from property investments can be used to offset capital gains from other investments, thus reducing overall CGT liabilities.
Determining Tax Obligations: A CGT property valuation provides an accurate assessment of the property's capital gain or loss, ensuring that taxpayers do not pay more tax than necessary. By factoring in all relevant expenses, taxpayers can minimize their CGT liabilities effectively.
In conclusion, navigating the complexities of CGT and property valuation requires a nuanced understanding of tax laws and valuation methodologies. As demonstrated, a thorough grasp of these concepts is essential for property investors seeking to optimize their tax outcomes and comply with regulatory requirements.