Capital gains on IP?

[Purple Patch]

I am looking at selling an IP on which I have sub divided the land an built in the backyard.

Firstly, how is the cost base determined for each new property? The initial purchase (674m2) was made in Aug 2003 for $160k and the subdivision was registered in Mar 2007. I am looking at selling the older house (378m2) before the years end, current valuation $210k and retaining the new house (296m2), current valuation $195k
I will have to pay discounted capital gains tax on the older property and I hope to sell for $220-$230k. The cost base when purchased was around $166k and I figure that this will have changed when the subdivision was registered. Can any one shed any light on how the figures work in this situation?

Secondly, I will sell the new property after 01 Jul 08. I do not require depreciation to service the loan and as yet have not acquired a depreciation schedule. If I do go down the path of claiming depreciation, how will this change the cost base of the property when I do sell? Is it decreased by the amount I have actually claimed or by the total amount claimable over the life of the prepared schedule?

Hope this makes sense!

 

[kris]

I'm going to assume that the property wasn't ever your primary place of residence, if it was then the following probably won't be correct.

Initial Purchase 160k, 674m2 in aug 03.
Subdivision in 07 is 378m2 (old house) 296m2 (new house)

When you subdivide the cost base is split. The easiest way to do this would be apportion the 160k over the 2 properties based on the m2. So the old house would take on a cost base of approx 90k and the new house would take on 70k.

However, if say the old house was far better the the new house you can change that to different percentages. For example if the new house was on a clear flat bit of land and the old house was on a hilly swamp marsh then you may value the cost base of the new house as 120k and 40k for the old house. You have to be able to justify it however, you can't just make one block $159,999 and the other $1 to minimize the current capital gain.

Once you have worked out the cost base then you will use the purchase date as aug 03. The reason being that the subdivision doesn't give rise to a capital gain and the only change is that the cost base is split. Being that the purchase date is aug 03, you can get the 50% discount for both sales.

The last consideration to make clear to yourself is that the subdivision and sale is on capital account and not revenue. What I mean by this is are you doing this subdivision in an enterprising fashion? I'll give you a clear example to hopefully explain the crux of what is meant by this.

Say Joe buys a block of land with the purpose of growing sugarcane. However, it turns out that the crop doesn't grow there very well and he decides to get rid of it all and then subdivides into 30 different blocks and sells them off. His original intention leads us to believe the subdivision and subsequent sales are on capital account (and 50% discount can be used if held for over 1 year) because he is merely realising his asset as best he can.

However, say Joe split it into 30 blocks and puts in a sewerage system, lays roads and signs and puts an office out front selling the land. This now shows his actions as more of carrying on an enterprise and hence it would be seen on revenue account (shown as income rather then going through capital gains).

Hopefully that is clear enough for you! You should see an accountant though as it can get quite complex as if you are doing it in an enterprising fashion then you have issues such as registering for GST.

As for the depreciation it is important to get a quantity surveyor to come and give you at least the capital works deduction which you can claim. You can amend up to 4 years of previous tax returns to claim this as well. The reason why it's so important is because your cost base must be reduced by not only the capital works deduction you claimed but also that of which you could have claimed.

"Is it decreased by the amount I have actually claimed or by the total amount claimable over the life of the prepared schedule?" Just by the amount claimable on the schedule up to the point in time you sell the property.

I hope this helps you a bit, perhaps check out the ATO site for more information or consult an accountant.

*The above is no tax advise

 

[Purple Patch]

Thanks for that Kris