Property Valuation for Capital Gains Tax

Capital gains tax (CGT) is the tax payable on profits from selling assets, such as property. The capital gain is the difference between the selling price and the purchase price less incidental capital costs.

Capital Gains from Sale of Property

When you sell a rental property, which is deemed an investment property (as opposed to your PPOR or Principal Place of Residence) that was purchased on or after 20 September 1985, you may make a capital gain or loss. In an equation, it looks like this:

Capital Gain = Selling Price – Cost Base

whereby the Cost Base is what it cost you to buy the property, plus other costs you incur to hold and dispose of it.

CGT Cost Base

The CGT Cost Base of a property comprises the following five elements:

(1)  Purchase price or Market Value of the property.

This is the amount paid for the asset or its market value if gifted to a loved one or sold to a friend for an amount that is lower than what it is worth. To establish this market value, ValuConsult is often commissioned to undertake a Capital Gains Tax Property Valuation that meets all the requirements by the Australian Taxation Office (ATO).

(2)  Incidental costs of acquiring the property.

Incidental costs you may have incurred when you purchased the property could include: payment for professional services (to a surveyor, valuer, accountant, buyer’s agent, consultant or legal adviser); property transfer costs; stamp duty; advertising or marketing costs to find a seller; title search fees; loan application fees.

(3)  Costs of owning the property

These include: rates; land taxes; repairs; insurance premiums; and owners corporation charges.

(4)  Capital costs to increase or preserve the value of the property.

These are costs you incurred for the purpose of increasing or preserving the property's value. For example, the costs of applying (successfully or unsuccessfully) for zoning changes; capital expenditure for installing a new kitchen or adding a new deck.

(5)  Costs of preserving or defending your title or legal rights to your property

These could include legal fees incurred when defending the title on the property or challenging property boundaries.

Hence, from the CGT equation (that is, Capital Gain = Selling Price – Cost Base), one way of reducing the capital gain is by increasing the cost base.

Additionally, if you acquired a property before 21 September 1999, you can index the property’s cost base for inflation up to that date instead of using the 50% CGT discount. Like the CGT discount, indexing the cost base will reduce the capital gain on the property.

Indexation of the Cost Base

Indexation of the cost base adjusts the amount of a property’s costs by the rate of inflation which is tracked by the consumer price index (or CPI). The increased cost amounts will reduce your capital gain on the property.

The indexation of the cost base is subject to three conditions:

(1)  The costs must have been incurred by 21 September 1999.

(2)  You can only index the cost base up to 30 September 1999.

(3)  Costs of owning the property (such as rates; land taxes; repairs; insurance premiums; and owners corporation charges) cannot be indexed.

When to use Indexation of the Cost Base?

If your investment property is eligible for indexation, it is probably also eligible for the 50% CGT discount for individuals.  You can use either the Indexation or the CGT discount method but not both.

Example 1: CGT Calculation for a Single Property

In November 2017, local resident Janet buys an established home in Melbourne for $800,000 and rents it out. She sells it 4 years later for $1,200,000. At the date of sale, she has no other capital gains or losses from other assets.

A CGT event is triggered at the contract date of the sale (not the settlement date), with the capital gain calculation as follows:

(1)  The capital proceeds from the CGT event are $1,200,000.

(2)  The cost base is $872,470, made up of:

 * purchase costs of $800,000 + $43,070 stamp duty + $1,400 conveyancing fees

* sale costs consisting of $1,600 conveyancing fees + $26,400 agent's commission.

(3)  Janet’s capital gain on the investment property is $1,200,000 − $872,470 = $327,530

(4)  As she is an Australian resident and owned the property for more than 12 months, Janet is entitled to the 50% CGT discount. So her CGT is 50% x $327,530 = $163,765.

(5)  Janet reports a net capital gain of $163,765 in her income tax return for the financial year in which this CGT event occurred. She will pay tax on this gain at her marginal income tax rate.

NOTE: In this example, no Capital Gains Tax Property Valuation was required to determine the market value of the property. As the property was rented out soon after it was purchased, the purchase price of the property was used in calculating the cost base.

Example 2: When  is a Capital Gains Tax Property Valuation required?

Peter bought a house in August 2013 for $630,000. The house was his main residence until he moved into a new house on 15 September 2021.

On 23 September 2021 he began renting out the old house. Just a week before the tenant moved in, on the advice of her accountant, she engaged ValuConsult to carry out a Capital Gains Tax Property valuation to determine the market value of the old house. The property valuer assessed the Market Value of the property at the amount of  $1,100,000.

Peter did not want to treat the old house as his main residence under the ‘continuing main residence status after moving out’ option as he wanted the new house to be treated as his Principal Place of Residence (PPOR) from the date he moved into it.

In May 2022 Peter sold the old house for $1,180,000. It is considered that Peter acquired the old house for $1,100,000 on 23 September 2021 and calculates his capital gain to be $80,000 (ignoring other costs for this example).

Due to the fact that it is considered that the old house was acquired on 23 September 2021, Peter is considered to have owned it for less than 12 months and therefore cannot use the CGT discount to reduce his capital gain.

Note: In this example, using the 'home first used to produce income rule' by the ATO, the market value from the Capital Gains Tax Property Valuation prepared by ValuConsult and not the purchase price was used in calculating the cost base.

Important Reminder regarding Market Value for the 'home first used to produce income rule' requiring a Capital Gains Tax Property Valuation

Due to ignorance or procrastination, many property investors missed engaging an accredited property valuer like ValuConsult to assess the Market Value of the investment property when it was first rented. Therefore, they then require a Capital Gains Tax Property Valuation that is back-dated to the time the property 'became' an investment property. These type of valuation is known as a Retrospective Valuation.