Sarah purchases a holiday home in August 2011 for $350,000. She incurs a legal fee and stamp duty in relation to the purchase of $5,000.
In October 2011, she makes various repairs to the property in order to update it for the summer. These repairs to the property include painting and roof repairs at a total cost of $3,000.
In February 2011, she begins construction of a garage on the property. The construction is complete in September 2011 at a total cost of $50,000 paid on completion.
In late 2012, Sarah is approached by a developer who wishes to build a multi-unit apartment on the site of her holiday home.
In March 2013, Sarah enters into a contract to sell the property to the developer for $200,000 plus a unit in the holiday apartment valued at $300,000. Sarah incurs legal fees of $1,000 in relation to this sale to be completed in July 2013. At this time Sarah will receive a cheque for $200,000 and the title to her new unit.
Assume that part of the purchase price of the holiday home was funded by a loan and that, over time Sarah owned the property, she paid interest totaling $90,000.
- What are the income tax consequences of these facts?
- What difference would it make if Sarah rents out the property each summer?
- What difference would it make to the initial situation if the total amount of interest paid is $95,000?
Assuming that no other CGT events occur.
Total proceeds are $500,000 (money 200k + property 300k)
Outgoings (s 110-25 cost base):
- CGT 2 & 3 NOT included in cost base as previously deducted from rent (Not deductible)
| Item | Amount | Category |
| Purchase price | $350,000 | 1 |
| Legal Fees/Stamp Duty | $5,000 | 2 |
| Repairs | $3,000 | 3 |
| Legal Sale Fee | $1,000 | 2 |
| Interest | $90,000 | 3 |
| Garage | $50,000 | 4 |
| Total | $499,000 (500k) | Cost Base < (Capital Proceeds) |
Exceeds $1,000 capital gain. Held property more than 12 months: $1,000 / 50% = $500 Capital Gain
- Alternative example: initial repairs different OR indexation no longer applies.
- Value of land we usually just assume
- Variation: Rent 110-45(1B)
- Interest claimed annually
- Legal fees can be deductible if ongoing costs (in this case not deductible)
- Repairs are deductible
- Improvement garage not deductible
NEW COST BASE $406,000
NEW CAPITAL GAIN $94,000 / 50% = $47,000
What if interest were $95,000? COST BASE NOW $504,000, CAPITAL GAIN proceeds > Costs, 500 < 504
Reduced COST BASE 3 Not deductible, NEW COST BASE $406,000, CAPITAL LOSS 500 > 406
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