This an argument between my accountant and myself which has been going for three years now.
“Does ALL depreciation previously claimed on an IP get added back, when calculating capital gains tax?”
My accountant keeps adding the lot back. I say its only the capital or building writeoffs. She vows and declares, she has checked it thoroughly and everything, including the stuff written off in the under $300lvp on the first year, gets added back.
This is potentially costing me many thousands of dollars as I am currently selling down a few per year to pay out loans on other Ips. Who is right? [confused2]
If you want to get out of a hole, first stop digging.
Hi Brenda
I thnk it all depends on when you purchased the property. The rules changed a few years back, and now depreciation gets added back. I am not sure on this as I have not sold anything since the rules came in.
Terryw
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Brenda it depends on when the asset was purchased. The sale of your rental property will include depreciating assets and a balancing adjustment will happen to those assets.
You work out the balancing adjustment by comparing the assets termination value (that is, the proceeds from the sale of the asset) and its adjustable value at the time of the balancing adjustment event. If the termination value is greater than the adjustable value, you include the excess in your assessable income. If the termination value is less than the adjustable value, you can deduct the difference.
You will be required to use the apportioned capital proceeds between the property and the depreciating assets to determine the separate tax consequences for them.
However any assessable balancing adjustment amount or capital gain may be reduced if a balancing adjustment event occurs to :
– an item that was acquired before 11:45AM on 21 September 1999 or ;
– a depreciating asset acquired before 1 July 2001 that is not plant.The amount of the reduction is the cost base of the asset for capital gains tax purposes less its cost.
Hi Brenda
Your accountant may be calculating it wrong. The calculation of CGT with regards to real estate is:
1. Work out your cost base (this is purchase price + legal fees + stamp duty, etc + capital works deductions). So yes, you do add back any capital or building write-offs as you have stated.
2. Deduct the cost base from the sale price. If you have made a profit then that is your total capital gain. This can then be reduced by 50% if owned for more than 12 months.
3. Now the important bit……if when deducting the cost base from the sale price, you have actually made a loss, then you need to recalculate your cost base. You do this by adding back any depreciation you have claimed on the property’s assets. This new cost base calculation is called the reduced cost base.
4. Once you determine your reduced cost base and subtract it from your sale price, if you have still made a loss then this is the figure you use on your tax return for carried forward losses (or apply it to any other gains you made). If you have made a profit though using the reduced cost base, then you have neither made a gain or a loss and no action is required.
I hope this helps and does not confuse you too much. You can look this up on the ATO website at:
Lisa
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