All Topics / General Property / capital gains and depreciation

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  • Profile photo of stargazerstargazer
    Participant
    @stargazer
    Join Date: 2002
    Post Count: 344

    Hi all

    I have just got a response from my accountant in relation to the capital gains i would need to pay.

    His response was that i have to pay back

    building depreciation
    fittings depriciation

    his calculations do not look right.

    He has made no concesion for agents fees etc.

    Well i get confused when i get one answer from an accountant and another from other investors.

    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.

    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%

    regards
    alf

    Profile photo of papajoepapajoe
    Member
    @papajoe
    Join Date: 2003
    Post Count: 8

    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.

    Profile photo of stargazerstargazer
    Participant
    @stargazer
    Join Date: 2002
    Post Count: 344

    Hi

    From further investigations it appears that
    building depreciation is the only consideration when calculating the cost base according to some seasoned investors.

    This can be found on the ATO website under rental properties 2002-2003 pages 9-24 Re:Capital Gains Tax.

    regards
    alf

    Profile photo of Steve McKnightSteve McKnight
    Keymaster
    @stevemcknight
    Join Date: 2001
    Post Count: 1,763

    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:


    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.


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

    quote:


    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%


    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.
    **********

    Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
    https://www.propertyinvesting.com

    Success comes from doing things differently

    Profile photo of Fudge111Broz00Fudge111Broz00
    Participant
    @fudge111broz00
    Join Date: 2003
    Post Count: 245

    Yes Steve,

    I certianly understand that, so basically your depreciation that you once got tax deductions for then becomes tax assessable when you sell the property

    is this correct?

    Fudge111[:)]

    Profile photo of Steve McKnightSteve McKnight
    Keymaster
    @stevemcknight
    Join Date: 2001
    Post Count: 1,763

    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.
    **********

    Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
    https://www.propertyinvesting.com

    Success comes from doing things differently

    Profile photo of stargazerstargazer
    Participant
    @stargazer
    Join Date: 2002
    Post Count: 344

    Hi Steve

    i certainly ain’t going to argue this as you probably are right. I went on some discussions with some seasoned investors they quoted this from the rental properties 2003 ATO.
    Reduced cost base
    The amount of the capital works deductions you claimed or were entitled to claim for a building,other structure or improvement is excluded from the reduced cost base.

    regards
    alf

    Profile photo of Steve McKnightSteve McKnight
    Keymaster
    @stevemcknight
    Join Date: 2001
    Post Count: 1,763

    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.
    **********

    Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
    https://www.propertyinvesting.com

    Success comes from doing things differently

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