The effect on depreciation shedules when selling the house
- Thread starter Mom
- Start date
Hi Mom
Is the depreciation for the building itself (Div 43) or for chattels in the building (any furnishings, washing machine, air con, etc)
If it's building depreciation (and you bought after 13 May 1997) then you'll have to subtract all the depreciation from the original cost of the unit for CGT. So if you bought the unit for $200k net cost (incl SD, legals, etc) and have claimed $10k depreciation to date and sell it for $250k net proceeds (after REA fees, legals etc), your taxable capital gain is $60k, i.e. the 'cash' capital gain of $50k is increased by the depreciation you've claimed.
Both the $200k and $250k above are to be reduced by the agreed value of the depreciable assets (chattels) at the time of original purchase and subsequent sale.
The depreciation on chattels will depend on whether they're being sold with the unit or not. If they're not then you still own them so nothing to do. If they are being sold, you should agree with the purchaser what price is attributable to those items. But you'll need to be careful to come up with fair market prices.
You''ll have to work out the balancing depreciation on any non-building assets. For example, if you installed an air con unit for $2k 2 years ago and have claimed $200 depreciation to date, and the agreed value with the purchaser is $1,000, you get to write off the remaining $800 in the year of disposal. This is written off against your income, i.e. it is not CGT. (Assuming the unit has always been available for rent)
This all assumes you bought the unit since 20 Sept 1985 - which would be the case if you're claiming buildings depreciation. If you bought before then zero CGT!
Don't forget that if you've held it for more than 12 months you are only taxed on half the capital gain, again assuming it's been a normal rental property the whole time. But please speak to your accountant on this as you really don't want to make a decision on selling before knowing your true tax position.
Also, if you were selling in about 6 months time, say April/May 2009, you'd be better off waiting until 1 July 2009 to sign the contract, therefore delaying the payment of CGT by another 12 months. (unless you're making a loss and you have other capital gains to offset)
Sorry for the brain dump, I hope it helps.
Cheers
Jonathon
Is the depreciation for the building itself (Div 43) or for chattels in the building (any furnishings, washing machine, air con, etc)
If it's building depreciation (and you bought after 13 May 1997) then you'll have to subtract all the depreciation from the original cost of the unit for CGT. So if you bought the unit for $200k net cost (incl SD, legals, etc) and have claimed $10k depreciation to date and sell it for $250k net proceeds (after REA fees, legals etc), your taxable capital gain is $60k, i.e. the 'cash' capital gain of $50k is increased by the depreciation you've claimed.
Both the $200k and $250k above are to be reduced by the agreed value of the depreciable assets (chattels) at the time of original purchase and subsequent sale.
The depreciation on chattels will depend on whether they're being sold with the unit or not. If they're not then you still own them so nothing to do. If they are being sold, you should agree with the purchaser what price is attributable to those items. But you'll need to be careful to come up with fair market prices.
You''ll have to work out the balancing depreciation on any non-building assets. For example, if you installed an air con unit for $2k 2 years ago and have claimed $200 depreciation to date, and the agreed value with the purchaser is $1,000, you get to write off the remaining $800 in the year of disposal. This is written off against your income, i.e. it is not CGT. (Assuming the unit has always been available for rent)
This all assumes you bought the unit since 20 Sept 1985 - which would be the case if you're claiming buildings depreciation. If you bought before then zero CGT!
Don't forget that if you've held it for more than 12 months you are only taxed on half the capital gain, again assuming it's been a normal rental property the whole time. But please speak to your accountant on this as you really don't want to make a decision on selling before knowing your true tax position.
Also, if you were selling in about 6 months time, say April/May 2009, you'd be better off waiting until 1 July 2009 to sign the contract, therefore delaying the payment of CGT by another 12 months. (unless you're making a loss and you have other capital gains to offset)
Sorry for the brain dump, I hope it helps.
Cheers
Jonathon
Thank you very much, Jonathon. You have given me a clearer picture.
I have now concluded that if you're planning to bank on your property capital growth, it may not be to your advantage claiming on depreciation, since your tax only gives you 30% (I'm average income earner) back of say $5000 that you declare each year you owned it. Please let me know if you or anyone have different views.
I have now concluded that if you're planning to bank on your property capital growth, it may not be to your advantage claiming on depreciation, since your tax only gives you 30% (I'm average income earner) back of say $5000 that you declare each year you owned it. Please let me know if you or anyone have different views.
Unclaimed Div 43 is not added back, except for the portion of Div 43 that you omitted to claim for the current year and any recent years for which you're entitled to re-open your assessment. (Broadly either 2 or 4 years, depending on your specific circumstances, and of course you can then claim it back for those periods anyway)
If you never claimed Div 43 because you never received the appropriate information on original construction cost, then no add back is necessary.
Here's the link to the ATO website covering this: http://www.ato.gov.au/individuals/c...002/026/017/004&mnu=1051&mfp=001/002&st=&cy=1
Of course, as with all tax matters, nothing is ever straightforward, (particularly with CGT!) so please consult with your accountant before making any decisions.
Rob G is correct to say that you're generally better to claim the capital works deduction (Div 43), assuming that you're paying tax at 30% or higher.
If you're paying tax at 15% and the capital gain pushes you into the 40% or 45% bands then this might not hold true.
For example, if you've claimed $10k of Div 43 deductions at 15%, you've received $1,650 cash back (incl medicare). If the capital gain is then taxed at 40%, that $10k deduction will increase your CGT by (10k * 41.5% * 1/2) = $2,075. (incl medicare)
This is not as extreme a situation as it might appear. The 30% band is currently $46k, so a capital gain of $100k, assuming held for more than 12 months, would lead to a taxable gain of $50k, taking someone from the top of the 15% band to the bottom of the 40% band.
Cheers
Jonathon
If you never claimed Div 43 because you never received the appropriate information on original construction cost, then no add back is necessary.
Here's the link to the ATO website covering this: http://www.ato.gov.au/individuals/c...002/026/017/004&mnu=1051&mfp=001/002&st=&cy=1
Of course, as with all tax matters, nothing is ever straightforward, (particularly with CGT!) so please consult with your accountant before making any decisions.
Rob G is correct to say that you're generally better to claim the capital works deduction (Div 43), assuming that you're paying tax at 30% or higher.
If you're paying tax at 15% and the capital gain pushes you into the 40% or 45% bands then this might not hold true.
For example, if you've claimed $10k of Div 43 deductions at 15%, you've received $1,650 cash back (incl medicare). If the capital gain is then taxed at 40%, that $10k deduction will increase your CGT by (10k * 41.5% * 1/2) = $2,075. (incl medicare)
This is not as extreme a situation as it might appear. The 30% band is currently $46k, so a capital gain of $100k, assuming held for more than 12 months, would lead to a taxable gain of $50k, taking someone from the top of the 15% band to the bottom of the 40% band.
Cheers
Jonathon
The ATO released a practice statement indicating whether the cost base needs to be adjusted for Divison 43 http://law.ato.gov.au/atolaw/print....1217000001&Life=10010101000001-99991231235959
Hopefully Dr Henry will make this all easier.
Hopefully Dr Henry will make this all easier.
You cannot merely elect to ignore Div 43.
The Practice statement allows rare circumstances where it is unreasonable to obtain the information.
You buy from a builder or a previous IP owner then they are LEGALLY required to provide you with this information and you are LEGALLY required to use Div 43.
The deductions are partially clawed back by removal from the cost base.
If you take those tax savings and invest them until the time when you sell the house and pay back 50%(discount) in the future, you will usually be better of even if that was in a higher tax bracket.
Even without discounting the cash flow ...
e.g. 5 years of $6000 Div 43 deductions followed by a discount CG clawback of $15,000 sounds pretty good to me.
I would invest the cash saved whilst on the lower tax rate, mitigating some of the pain of being assessed on that $15,000 at a higher marginal rate in the year of sale.
Cheers,
Rob
The Practice statement allows rare circumstances where it is unreasonable to obtain the information.
You buy from a builder or a previous IP owner then they are LEGALLY required to provide you with this information and you are LEGALLY required to use Div 43.
The deductions are partially clawed back by removal from the cost base.
If you take those tax savings and invest them until the time when you sell the house and pay back 50%(discount) in the future, you will usually be better of even if that was in a higher tax bracket.
Even without discounting the cash flow ...
e.g. 5 years of $6000 Div 43 deductions followed by a discount CG clawback of $15,000 sounds pretty good to me.
I would invest the cash saved whilst on the lower tax rate, mitigating some of the pain of being assessed on that $15,000 at a higher marginal rate in the year of sale.
Cheers,
Rob
Rob
Couldn't agree more about the desireability of making the deduction, in the vast majority of real life situations
I also agree with you that ITAA requires the vendor to supply the construction cost info (if they have it or reasonably ought to have it).
However I'm confused about your statement that you're legally required to use your eligible Div 43 deductions, given that it's unusual that yo're ever forced to use a deduciton. Where is this set out in the legislation?
Thanks
Jonathon
Couldn't agree more about the desireability of making the deduction, in the vast majority of real life situations
I also agree with you that ITAA requires the vendor to supply the construction cost info (if they have it or reasonably ought to have it).
However I'm confused about your statement that you're legally required to use your eligible Div 43 deductions, given that it's unusual that yo're ever forced to use a deduciton. Where is this set out in the legislation?
Thanks
Jonathon
Hi Jonathon,
You cannot elect to ignore Div 43.
The cost base will be reduced by these amounts even if not claimed.
Then you are only able to amend the last few years assessments subject to your 2 or 4 year limit to retrospectively claim.
There is nothing like the discretion given to the Commissioner on other CGT issues !!
Incidentally, I have heard that the Commissioner has not pursued some vendors who do not supply the information - which can put you in a hard postion !!
Cheers,
Rob
You cannot elect to ignore Div 43.
The cost base will be reduced by these amounts even if not claimed.
Then you are only able to amend the last few years assessments subject to your 2 or 4 year limit to retrospectively claim.
There is nothing like the discretion given to the Commissioner on other CGT issues !!
Incidentally, I have heard that the Commissioner has not pursued some vendors who do not supply the information - which can put you in a hard postion !!
Cheers,
Rob
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