Calculating the cost base for real estate PDF

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Calculating the cost base for real estate To calculate a capital gain or loss, you need to know the assets:  cost base to calculate a capital gain  reduced cost base to calculate a capital loss. The basic rules are the same for all assets, but for real estate there are some additional rules for:  costs of owning  cost base adjustments for capital works deductions.

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. Example On 1 July 2014, Kris bought a block of land for $240,000 (including legal fees, stamp duty and related expenses). He sold it on 30 June 2019.

During the five years he owned the block, he paid $25,000 for rates, land tax and interest. As he did not use the land to generate any income, he could not claim a deduction for any of these expenses. The cost base of the block of land is $265,000. End of example

Cost base adjustments for capital works deductions In working out the cost base or reduced cost base for a property that you've used to produce assessable income, such as a rental property or business premises, you may need to exclude any capital works deductions you've claimed in any income year (or omitted to claim but can still claim because the period for amending the relevant income tax assessment has not expired). You exclude the amount of these capital works deductions from:  the reduced cost base of the asset  the cost base of the asset (including a building, structure or other capital improvement that is treated as a separate asset for CGT purposes) if: o you acquired the asset after 7:30pm (by legal time in the ACT) on 13 May 1997, or o you acquired the asset before that time and the expenditure that gave rise to the capital works deductions was incurred after 30 June 1999. However, if you omitted to claim capital works deductions because you didn't have sufficient information to determine the amount and nature of the construction expenditure, you don't need to exclude the amount of such deductions from the cost base or reduced cost base of the CGT asset. Example: Sale of a rental property

Brett purchased a residential rental property on 1 July 1997. He paid $150,000 for the property, of which $6,000 was attributable to depreciating assets. He also paid $20,000 in total for pest and building inspections, stamp duty and solicitor’s fees. In the next few years, Brett incurred the following expenses on the property: Interest on money borrowed Council rates and land tax

$10,000 $8,000

Deductible (non-capital) repairs

$15,000

Total

$33,000

Brett can't include the expenses of $33,000 in the cost base as he was able to claim deductions for them. Brett decided to sell the property, and a real estate agent advised him that if he spent around $30,000 on major structural repairs, the property would be valued at around $500,000. The major structural improvements were completed on 1 October 2018 at a cost of $30,000. On 1 February 2019, he sold the property for $500,000 (of which $4,000 was attributable to depreciating assets). Brett's real estate agent’s fees and solicitor’s fees for the sale of the property totalled $12,500. Brett can claim a capital works deduction of $255 ($30,000 × 2.5% × 124 ÷ 365) for the major structural improvements. This is Brett's only capital gain for the year and he has no capital losses to offset from this year or previous years. Brett works out his cost base as follows:

Purchase price of property (not including depreciating assets)

$144,000

Plus pest and building inspections, stamp duty and solicitor's fees on purchase of the property

$20,000

Capital expenditure (major structural improvements) $30,000 less capital works deduction ($255)

$29,745

Real estate agent's fees and solicitor's fees on sale of the property

$12,500

Cost base unindexed

$206,245

Brett deducts his cost base from his capital proceeds (sale price): Proceeds from selling the house (not including depreciating assets)

$496,000

Less cost base unindexed calculated above

$206,245

Equals

$289,755

He decides the discount method will give him the best result, so he uses this method to calculate his capital gain: $289,755 × 50% = $144,877 Brett shows $144,877 at Net capital gain on his tax return (supplementary section). Brett shows $289,755 at Total current year capital gains on his tax return (supplementary section). Brett must also make balancing adjustment calculations for his depreciating assets. Because he used the property 100% for taxable purposes he will not make a capital gain or capital loss from the depreciating assets.

Working out your capital gain or loss For every capital gains tax (CGT) event that happens to your assets during the year, you need to work out your capital gain or loss. If you have both capital gains and capital losses, you also have to work out your net capital gain or net capital loss for the year. If you have a distribution from a managed fund, the fund has already worked out your capital gain or loss and should have given you the information on a distribution statement. Individuals and small businesses (excluding companies) can generally discount a capital gain by 50% if they hold the asset for more than one year. There are three methods to work out your capital gain. There is only one way to work out a capital loss.

Find out about:  Working out your capital gain  Working out your capital loss  Working out your net capital gain or loss See also:     

Capital proceeds Cost base Depreciating assets and CGT Debt forgiveness and CGT International issues

 Managed investment fund (trust) distributions  Earnout arrangements and CGT

Cost base The cost base of a capital gains tax (CGT) asset is generally the cost of the asset when you bought it, plus certain other costs associated with acquiring, holding and disposing of the asset. There are some CGT events where the cost base and reduced cost base are not relevant. For example, if you enter into an agreement not to work in a particular industry for a set period of time, CGT event D1 specifies that you calculate your capital gain or loss by comparing the capital proceeds with the incidental costs, which is only one element of the cost base. Also the cost base of a depreciating asset is not relevant in working out a capital gain from that asset.

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