Understanding what capital gains tax is and how considering an independent property valuation can end up saving you thousands.
What is Capital Gains Tax (CGT)
A tax amount charged on the profit you make from selling assets that you may have purchased or inherited. Within Australia, CGT is an essential part of buying and selling a property.
When you report your income tax return you will add the capital gains and losses you have incurred, although it is referred to as CGT, this is not a reseparate tax.
Here is a run down of everything you need to know.
If you have decided to sell your property, it will be sold at either a profit or loss. CGT is a tax that is placed on any kind of capital gain that your assets make from the time of purchase of the property to the time of sale. Therefore, if the value of the asset increased during this time, you have acquired a gain in your capital. If it has decreased, then it is considered a loss. You can carry it forward and deduct it from capital gains in later years.
When financial year comes around, the capital gain you have earned will count as a taxable income in your tax return along with everything else tax related. Depending on the capital gain this will then calculate the amount of tax you will have to pay.
If your property was destroyed, compulsorily acquired, or transferred to a former spouse under a family law settlement, the capital gain or loss may be disregarded.
CGT was introduced 20th September 1985, so any asset or property that has been purchased or inherited since then, will be subject to this tax. Property that has be acquired prior to the date, will only incur certain capital improvements made after the date.
Another reason you maybe except from CGT is if you are an Australian resident and you, a spouse and other dependants have been residing in the property the whole period you have owned it, and it has not been used to produce an income e.g. (rented it out, or bought to renovate then sell as a profit) if you meet theses conditions then you are not required to pay tax and capital loss can be ignored. If you only meet certain conditions, you are still entitled to a partial exemption.
Another process to consider is a CGT event. This kind of process will be implemented when a simple contract of sale or buying shares have accrued.
Listed below are several categories to take into account for CGT event:
* End of a CGT asset
* The beginning of a CGT asset
* Cessation of Residency
* Special Capital Receipts
CGT events that are likely to happen are to do with businesses, real estate, leases, and shares. Visiting the ATO website, if you require more information of what event might be relevant to you.
Property Valuations and CGT
Do you own an investment property? Then you most likely will require a property valuation.
A property valuation is performed to determine the market value of a property, a report is then conducted and will be based on the size, location, condition.
Another variable factors a property valuer will take into account will be calculating the amount of CGT liability you owe when its time to report your tax.
The determined value of the property will inevitably affect the amount of CGT you would require paying, this will take affect if you decide to sell the property or change it to your primary place of residence.
To calculate this, will all depend on when the property started to as well as stopped making a profit. Known as the “value range”. If you want this to work out in your the amount needs to be as small as possible.
Optimistic vs. Pessimistic Valuing
An optimistic value means seeking the current market value that would sit on the higher end of the scale for the value of the property. If this is something that you are looking at, certain information is required for your valuer
* Development or renovation potential or pre-approval? (This might mean council zoning or council approved extensions, granny flats etc.)
* Any kind of infrastructural developments or public transport systems that can improve socio-economic conditions in the local area
* Recent renovations (including fixtures and fittings) on the property
* Favourable views e.g., city, skyline, water facing etc.
* Proximity to shopping districts, recreational facilities, schools, or the CBD
If a pessimistic value would be more beneficial to you, A valuer then requires the following:
* Any upcoming, essential work that needs to occur in order to repair the current state of the property e.g., plumbing or electricity issues.
* Upcoming developmental or infrastructure projects that may negatively affect the value.
* Proximity to low socio-economic areas of low-income housing
If you are not adequately prepared, CGT can be an unnecessary financial burden during tax time. CGT is complicated enough, so it’s important to stay accountable and responsible in retaining and organising your financial documents, keep everything up to date and correct, including any evidence of improvements, council documentation and any other supporting documents regarding the property as this will be beneficial to you as well as making a profit.
Seeking out a property valuer will make the process less complicated and stressful. Depending on the CGT event, we will ensure you receive an accurate determined value that will be within your best interests. Our team of independent local experts will help make selling your property or the transition of the investment property as your primary place of residence effortless.
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John Anderson is one of Melbourne’s leading experts in commercial and residential property valuation services. John is a registered Chartered Surveyor and Senior Property Valuer with over 20 years of professional experience providing property valuations across Melbourne and Victoria. His in-depth expertise in real estate and property has allowed him to share his specialised knowledge as an authority keynote speaker at conferences and universities across Melbourne.