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Capital works as tax deduction

Discussion in 'Real Estate' started by seeking_the_rich_dad, 16th Jan, 2007.

  1. seeking_the_rich_dad

    seeking_the_rich_dad Member

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    Hi all,

    I have a question regarding capital works - Can they be declared as a tax deduction against the sale of a property? By capital works I mean renovation costs.

    Here's my situation - I bought a property 6 months ago. Since then I have renovated it and now want to on-sell (it hasn't either been lived in by myself or rented out).

    So when I eventually sell, can I turn-around and go to the tax man (for example) and say "Yes, I made $40K profit on this property, but it cost me $20k to improve its value. Can I claim this as a tax deduction?"

    George
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I would have thought that such capital expenditure would be added to the cost base of the asset, thus showing a smaller capital gain when you sell ?

    In other words, I think it generally works exactly the way you mentioned ... but it's not so much a "tax deduction" as a reduction in the capital gain, hence less CGT paid.

    From your example, your net gain would be $20K and this is what you would pay CGT on. Which is what I think you were aiming for ?

    Of course, if you held for more than 12 months, you would get the 50% CGT discount as well.
     
  3. seeking_the_rich_dad

    seeking_the_rich_dad Member

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    Hey Sim,

    Yes, that's what I was aiming for - CGT on the $20K profit. OK, so the renovation costs get added to the base cost and it all works from there....cool.

    Thanks.

    Btw, if I hold it for a year, even if it's a rental, I still get the 50% CGT discount?

    George
     
  4. Glebe

    Glebe Well-Known Member

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    Yep I'm with Sim.

    Your cost base has increased, so your gain has reduced.

    And yes George if held for a year you're CGT is halved.
     
  5. Nigel Ward

    Nigel Ward Team InvestEd

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    At the risk of getting all tax technical...

    115-25(1) To be a * discount capital gain, the * capital gain must result from a * CGT event happening to a * CGT asset that was *acquired by the entity making the capital gain at least 12 months before the CGT event.


    115-100 The discount percentage for an amount of a * discount capital gain is:

    (a) 50% if the gain is made:
    (i) by an individual; or
    (ii) by a trust (other than a trust that is a * complying superannuation entity); or

    (b) 33 1/3% if the gain is made:
    (i) by a complying superannuation entity; or
    (ii) by a * life insurance company from a * CGT asset that is a * virtual PST asset.

    Fun huh? :rolleyes:
     
    Last edited: 16th Jan, 2007
  6. Jacque

    Jacque Team InvestEd

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    Spot on there George. Don't forget, however, that if you went and had a depreciation schedule done on the property then the benefits of these tax breaks will be deducted from your cost base. After all, you don't avoid paying tax with depreciation- you simply defer it until you do sell. The taxman giveth and he taketh away :D

    Nigel,

    Trust you to get technical- just what I'd expect from a solicitor ;)
     
  7. Nigel Ward

    Nigel Ward Team InvestEd

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    We'll Nick's been busy so someone has to bore people with tax :D
     
  8. seeking_the_rich_dad

    seeking_the_rich_dad Member

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    Hey Jacque,

    A depreciation is definately on the cards if I m going to hold and rent (not sure what I'll do yet). I had one done on my last unit (mid 2005) and its doing wonders for my tax refunds each year - reduces the negative gearing each week (when you go back and avg. it out over the year) by 30%.

    George