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capital gains included in Line of Credit?

Discussion in 'Accounting, Tax & Legal' started by Triu, 7th Dec, 2007.

  1. Triu

    Triu Well-Known Member

    Joined:
    1st Sep, 2006
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    Location:
    WA
    Hi this is a question for the accountants.

    If i bought a IP for a certain price then sold it and made a profit but it was crossed with my PPOR using a LOC. The end profit back to me will be less as the banks will get there money first.

    eg. Bought IP for $329k including all costs etc sold for $390k less costs say have gross profit of $50k which would then go back to the bank as it was crossed loan with PPOR. Do i still have to pay tax on the gross profit before bank takes it back?

    Not sure how the capital gains tax is worked out with lines of credit etc?

    can someone explain it!
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    CGT has nothing to do with the amount borrowed. It is simply (sales price less costs) - (purchase price plus costs) ... you pay tax on the net profit.

    What you then do (or more importantly - what the banks make you do) with the proceeds of the sale is irrelevant to the taxman ... so if you are forced to pay back the LOC, you'll still have to pay the CGT.

    You should talk to your bank about what happens when you sell your IP ... you may be able to refinance the loans or something to extract some of that equity.
     
  3. MattR

    MattR Well-Known Member

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    What ^ said.
     
  4. taxstar

    taxstar Active Member

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    One further point, if you have to borrow funds to pay the tax, that interest should be tax dedcutible to you as well.
     
  5. Rob G.

    Rob G. Well-Known Member

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    Interest expense on borrowings to pay an income tax liability is not deductible for an investor as far as I am aware ??

    Cheers,

    Rob
     
  6. taxstar

    taxstar Active Member

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    Yeah, Rob's right, you need to claim interest for tax debt under Sec 8-1 (running a business), for it to be deductible (working capital argument). Otherwise, investors tax liability re CGT is capital in nature.

    The silly thing is if you pay GIC, i.e. interest to the ATO rather than borrow the money yourself, that interest is deductible.