capital gains and depreciation

Alf

my wife and I bought a house Dec 2002 and sold June 2003.
Profit $32k was split across both our incomes and tax paid at our nominal rate of tax.
If we had sold after owning the property for 12 months, then our accountant said that 50% or $16k of profit would have been tax free and the other $16K would have attracted capital gains tax.
Building and fittings depreciation I’m not 100%sure about. I do know that building depreciation can vary depending on the age of your building.
Good luck and try another accountant. Find one that specializes in real estate investing.

Hi Alf,

Don’t quote me on this (IE. This is NOT advice), but my understanding was that:

1. Fixture and fittings depreciation is 100% repayable (ie. outside the 50% exemption).

2. The building writeoff came off the cost base of the asset, and as such was OK re: capital gains purposes.

Quick example…

A. $100,000 property bought (nett) 7/2001
B. Depreciation b/w 7/01 and 6/03:

Fixtures and Fittings: $10,000
Building writeoff: $3,000

C. Property sold for (nett) $150,000 in 6/03
D. Tax calc:

1. Carrying value of the property is $87,000 ($100,000 – $10,000 – $3,000).

2. Taxable profit on sale therefore $63,000 ($150 – $87,000).

3. Of this taxable profit:

$10,000 is a balancing adjustment as it represents recouped depreciation (fully taxed at the taxpayers applicable marginal income tax rate)

$53,000 is a capital gain, of which 50% would be exempt and 50% taxed at the taxpayers applicable marginal income tax rate.

Ie: amount to be included in the tax return:

Balancing charge: $10,000

Included because the asset appreciated, rather then depreciated!

The only way to get around this is to individually itemise on the sale agreement what you’re buying and pay more for the land and less (ie. book value) for the depreciated chattles.

and

Capital Gain: $ 26,500

Hope this is clear enough… this should definitely be discussed with a qualified tax adviser.

Further Study

Balancing adjustments:http://www.ato.gov.au/individuals/content.asp?doc=/content/31610.htm&page=5#P402_36398

Capital Works
http://www.ato.gov.au/individuals/content.asp?doc=/content/31610.htm&page=7#P585_51465

Items affecting an assets cost base
http://www.ato.gov.au/individuals/content.asp?doc=/content/31610.htm&page=7#P689_60350

Specifically For You

quote:

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Also if anyone knows if one claims say 2.5% building dep. on 100000 building cost.

[email protected]%=2500
30% tax rate=750

which figure does one use for the CGT the 2.5% or the 750 30% tax rate.

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Your cost base would be reduced by $2,500.

quote:

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The other question i have is if one sells in the financial year and makes a profit is that profit added to the say wages taxable income so one pays the higher tax rate.
eg.
taxable income 48000
profit 90000
CGT………? 30% or at 48.5% for calculation
is the tax worked out at 48000 that is 30% for CGT purposes or the higher tax rate of 48.5%

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OK – I assume ‘profit’ here is CGT, yes?

If so, and it was an individual, then 50% of it would be exempt, so included in the tax return would be:

salary (?): $48,000
capital gain ($90k * 50%): $45,000
Taxable income: $93,000
Tax payable: $31,090 + medicare

Hope this has helped you understand the concept further.

Cheers,

Steve McKnight

**********
Remember that success comes from doing things differently.
**********

Hi Fudge111,

Yep spot on.

Depreciation is tax deferral, not a tax saving.

They don’t tell you that at the free seminars []!

See ya,

Steve McKnight

**********
Remember that success comes from doing things differently.
**********

Alf,

Yes – I agree with you!

Building writeoff (now called capital works) comes off the cost base (ie. is not a balancing adjustment).

However, depreciation of fixtures and fittings does NOT come off the cost base. Instead, it is (usually) repaid if the property value appreciated rather than depreciated.

This point outlines the different tax treatment of the two types of depreciation deduction. See my earlier example to numerical clarification.

Cheers,

Steve McKnight

**********
Remember that success comes from doing things differently.
**********