Tax Q&A: Calculating a capital gain or a capital loss

10/01/2019

Question: Our property was purchased on 15 February 1996 for $173,750 (plus costs) and lived in as a principal place of residence (PPOR). Due to a work transfer, I relocated on 7 July 1997 and made the property available for rental on 8 July 1997. Its value was approximately $300,000.

The property was available for rent over the next six years, and its value at the end of that period (7 July 2003) was $950,000. The property has not been sold, but may be sold some time in the future. Nonetheless, assuming the property is sold for $1m today, what is the capital gain liability: $700,000 or $50,000 (excluding discounts, etc.)?

Do we use the valuation of 7 July 2003 as the basis for the CGT calculations upon the sale of the property, instead of calculating the taxable amount by multiplying the prorated gain realised since, for instance, 8 July 1997, by the proportion of days that the property was not considered to be a PPOR?

Today, the property would have a value of less than $950,000; therefore, if we could valuate it, a CGT loss would be incurred.

Thanks, Paul

Answer: If you started using part or all of your main residence to produce income for the first time after 20 August 1996, a special rule applies to calculating your capital gain or capital loss.

In this case, you are considered to have acquired the dwelling at its market value at the time you first used it to produce income if all the following apply:

• you acquired the dwelling on or after 20 September 1985;
• you first used the dwelling to produce income after 20 August 1996;
• when a CGT event happens to the dwelling, you would get only a partial exemption, because you used the dwelling to produce assessable income during the period you owned it; and
• you would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before you first used it to produce income.

If all of the above apply, you must work out your capital gain or capital loss using the market value of the dwelling at the time you first used it to produce income. You do not have a choice.

You must work out capital gain or loss using the market value of the dwelling at the time you first used it to produce income

In summary:

The property was purchased on 15 February 1996 and used as your main residence until 7 July 1997. It has been used as a rental from 8 July 1997 until now. (Required – valuation as at 7 July 1997.)

Therefore the property will be caught under the rules for using your main residence to produce income after 20 August 1996, ie this commenced on 8 July 1997. The total capital gain will be the capital proceeds less cost base (using above) adjusted by the proportion of non-resident days to total ownership days to determine the taxable gain.

Capital proceeds equal the net selling price, ie $950,000.

Cost base equals the valuation when you moved out, ie on 7 July 1997, plus any selling costs, ie $300,000 plus selling costs.

The non-resident portion equals the days from commencement of the rental period, plus six years, to the sale date. The period of total ownership is the number of days from the date of moving into the property initially to the sale date.

As the property was owned for more than 12 months from the date it was first used as a rental until the sale, the 50% CGT general discount would apply.

Need to know

- CGT treatment differs if the property was first used to produce income after 20 August 1996.

- The market value of the dwelling in this case is its value at the time it was first rented out.

- The 50% CGT discount applies if the property was owned for 12 months plus.

Ken Raiss

is director of Metropole

Wealth Advisory