When you change your residence to an investment property, the topic of Capital Gains Tax or CGT becomes an important part of your consideration with regard to your investment.
In a Nutshell, what is Capital Gains Tax?
Capital gains tax is the profit that is made upon the selling of your investment property. This is calculated either from the date of settlement from a purchase or inheritance, when your primary place of residence becomes an investment property or when you turn your investment property into a primary place of residence.
Why does Obtaining the Right Property Valuation Matter?
- Determining the amount of Capital Gains you Pay: How much your property is valued directly affects the amount of CGT that you pay. A valuation that is inaccurate can mean that you may be overpaying on your capital gains tax. On the flip-side, if your property is undervalued, it places you with the potential for being heftily fined by the Australian Tax Office (ATO).
- Compliance with the requirements from the ATO: The ATO specify that valuations should be conducted by professional valuers. These reports are considered more credible than a valuation which is not provided by a professional valuer. In general, if a valuer is properly engaged and instructed, then there is no liability should the professional valuation is insufficient.
Reasons why you would need a valuation for Capital Gains Tax
A valuation can be required at a number of instances, and not just when you are selling or have sold your property. Such reasons for a valuation report to determine Capital Gains Tax include for Probate purposes, if you have received the property as a gift or you may have obtained it as a part of settlement proceedings from a divorce.
The Six-Year Rule
There are some circumstances where Capital Gains Tax does not apply and you would not need a valuation. One of these situations is when you stop living in your main residence and you are not claiming another property as your main residence. In this situation, it can still be treated as your main residence for up to a total of 6 years if you are collecting rental income or for as long as you like if there is no income received. This is the 6 year rule.
However, it must be noted that no other property can be considered as your main residence during this time unless you are moving into a new home- and this is for a period for up to 6 months.
Tips for Managing your Property with Regards to CGT Valuations:
- Plan ahead: It is good to obtain a valuation in advance to help with understanding the tax implications.
- As noted earlier, you may be applicable for certain exemptions or concessions (such as the 6-year rule). You may be able to seek this advice from your accountant or the ATO.
- Record keep: Keep detailed records on the costs relating to your property including the purchase price, cost of any updates or renovations and the circumstances of the sale. Also useful is to keep a copy of the contract of sale and any floor or strata plans of the property.
- Keep a note of the date you have made your property available for rent.
Conclusion
Capital Gains Tax is a tax which applies for your investment property. As indicated earlier, an event such as turning your primary place of residence into an investment property or even an inheritance may trigger the requirement to pay CGT should you sell your property. Obtaining an accurate valuation from a registered valuer is key to ensuring that you are not over or underpaying this tax and to ensure that you are keeping to compliance with the ATO. If you have any further questions about needing a valuation, it may best to speak with your accountant and if you do need a valuation, feel free to reach out to one of our friendly valuers.