Tax Tip 26: Claim interest on a main residence against CGT on sale

Claim interest on a main residence against CGT on sale

Sometimes a property which has been the main residence for only part of the time held will attract CGT when sold. This may be because

1. You have moved into a rental property, and/or
   
   
2. Your main residence has been rented out, and/or
   
   
3. You have run a business from your main residence.

Not many know that interest and other costs which have not been otherwise claimed can be used to reduce the CGT when the property is sold. This includes costs incurred while it was a main residence and not income producing.

See s 110-15(3) ITAA97 The 3rd element of the cost base of a property:

Element three: Non-capital costs you incur in connection with your ownership of a property which you acquired post 20 August 1991; for example - interest on money borrowed to acquire an asset, costs of maintaining, repairing or insuring the asset, rates and land tax.

Don’t forget to include any borrowing costs not already claimed - such as LMI which is often a large expense.

 

2 questions:

1) Do "other costs" include fixed utility costs? e.g. flat-rate apartment water fees, or electricity service availability charges? (I assume per-unit usage charges aren't included)

2) Are these costs factored in:
a) before the 50% CGT discount (which I assume is used when CGT exemption isn't used)?
b) after apportioning the total capital gain (between buy and sell) by the % of time the property was used as an IP?

(If I'm not making any sense with 2b, it's because my accountant said that's how the CG is calculated... but they also wanted valuations when they switched from PPOR to IP... not sure how the valuation factors in)

 

1 - costs of maintaining, repairing or insuring the property would be included. Don't think utilities would apply

2a before
b before

 

Take care - There are many issues that can affect which costs can be included or not included.
eg
- If property has been subject to s118-192 at any time
- Property previously subject to a marital split
- Residency / Non-residency changes
- Changes to the site eg : Building a duplex or a dev)
- On large areas of land : If the land is not adjacent to the main residence perhaps.
- Adjustments for capital allowances and depreciation previously claimed can alter the cost base

The whole issue of CGT is very complex and its not uncommon that DIY taxpayers get it wrong...Both under or over. For example I wish I had a dollar for every taxpayer who has c/fwd losses who thinks they can work out the cap gain then halve it ....then deduct the losses.

 

1. No. These are not ownership costs
2. Depends. Not all taxpayers get a discount. There is a precise formula for working out a CGT amount.

Valuation under s118-192 would preclude any ownership costs before the relevant date. !!
s118-192 specifically uses the market value at the date a IP first earns income and doesn't give a taxpayer any choice about the cost of the driveway installed the month before as an example.

 

Thanks Paul, CGT's complexity is abundantly clear to me now Just trying to get a better understanding of it, but will let my accountants do their usual good work. No CGT event happening for me in the foreseeable future anyway!

 

You could got a dollar from me two years ago.
Now, you can't ;-)

Wishful thinking:
Capital Gain x 0.5 - Carry Forward Loss

Cruel reality:
(Capital Gain - Carry Forward Loss) x 0.5

 

Hi Terry - I'm confused about the CGT issues of selling a ppor which was partially used for business, so here's a hypothetical for you

WorkerBee lived in her ppor for one year, and claimed 30% of her mortgage expenses as a home office expense. In the second year, she still resided in the ppor but did not claim home office expenses. In Year 3, she moved out and rented the ppor out, and claimed 30% of her rental costs as the cost of running her home office.

4 years after moving out of the ppor, she sells it (in Victoria - using the 6 years exempt rule?) In this case, what will the CGT be, if any?

 

Many issues there. Perhaps 30% subject to cgt.

 

Home office costs at 30% may be excessive. I would argue its important for any taxpayer who uses their home as a place of business get personal advice before attempting to claim any ownership costs. And then a measurement of the area in use. A home office for a mortgage broker may not give rise to ownership cost deductions and likewise there may be no CGT issue if they partially use their home for work rather than have a full time dedicated use say part of the garage etc....And if the home is used for clients etc this can be far more certain that just a home office etc which is used to do part of the income producing work.

Running your business from home | Australian Taxation Office also explains that the CGT may need to be adjusted for the time used as a POB, the area and other factors where there may be exemptions. The onus will fall on the taxpayer to include a reasonable amount of cap gain rather than follow a prescribed formula.

 

Paul makes a great point!

 

For a property that began as an IP for a couple of years then became ppor for another couple of years, does any interest paid when it was a ppor count as an offset against CGT when sold?

 

does a bear poo in the forest? (excluding polar bears)

Tax Tip 318: Can you Claim 3rd Element CGT Cost Base Expenses while living there?
http://bit.ly/3qX9Nsm

 

Love it! I am working my way through your tips!!!!

 

Not always.

Consider if s118.192 applies to the time when the [property FIRST produces income. If so, all ownership costs prior to that date can be ignored. Thereafter CGT may be pro-rata. If so. The ownership costs which it is your residence will add to the costbase.

If s118.192 isnt available then all ownership costs can be counted for the full period. Tyical examples:
- property is PARTIALLY used at anytime to produce income; or
- Prioperty was initially an investment (eg bought with tenants who mved out after 3 weeks). In which case all ownership costs NOT claimed as adeductions can be added

3rd element CGT costs are often overlooked. I attended a NTAA tax school yesterday and on TWO occassions they gave examples of basic CGT issues concerning a home and ignored the 3rd element costs which could add to the cost base in cases when pro-rata cgt applies

 

A related thread

Tax Tip 318: Can you Claim 3rd Element CGT Cost Base Expenses while living there?
http://bit.ly/3qX9Nsm