All Topics / Help Needed! / When I sell my IP, do I need to pay off negative gearing i claim from tax return

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  • Profile photo of NanNan
    Participant
    @nano
    Join Date: 2015
    Post Count: 26

    Hi,

    I have a question about negative gearing.

    For example, If I have an investment property bought at 460K, which is negative gearing, I am able to claim 10K tax return from ATO each year.

    After 4 years, when I sell this IP, I sell at 580K. So I earn 120K. In past 4 years, I claim 40K tax return from ATO due to negative gearing. After I sell this house, do I need to add these 40K benefit to 120K and pay for tax? Or I don’t need to pay back the negative gearings I claim from ATO for those years?

    Hope you can help me,

    Thank you,

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Hi Nan

    The cost base of the property is adjusted by any Capital Allowance claim you have made during the period of ownership.

    Your Depreciation Schedule will show you what you have claimed.

    Other adjustments such as stamp duty, selling agents fees etc need to be made to the cost base before calculating your Capital Gain.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of NanNan
    Participant
    @nano
    Join Date: 2015
    Post Count: 26

    Hi Richard,

    Thank you so much.

    Sorry, I am a bit new with all of these. You mention ‘any Capital Allowance claim’, does it include the strata fee, maintenance fee, agents rental management fee we claim every year?

    Kind Regards,

    Profile photo of StannisStannis
    Participant
    @ben-stanton0
    Join Date: 2015
    Post Count: 23

    Hi Nan,

    Cost base is affected by the depreciation you’ve claimed.

    Running costs, strata, insurance, all that stuff that are week to week expenses, do not affect the cost base.

    Just be careful with renos, that’s when things start getting a little more complicated.

    Invest in a good accountant with a property focus.

    To answer your original question, its a different equation, its not working out your total ‘negative gearing’ per se.

    I’ll run an example.

    Bought property for $400k, SD is $10k, legals and other costs in acquisition are $5k. (other costs could be inspections, buyers agent fees)

    Cost base is $415k

    Now when you sell, say for $500k, you take off your cost of selling – agents commission $10k, advertising and legals $5k. = $485k. So for capital gains purposes your numbers run like this.

    $485k-$415k = $70k capital gain

    If held for more than a year, than a 50% CGT discount applies. Lets assume you held it for 5 years.

    BUT

    say you’ve claimed depreciation each year, and it was a new house, so there was $5k worth of dep. each year that you claimed in each tax return.

    this gets taken off your cost base.

    So, $415k – (5 years x $5k) = $390k.

    So now your tax liability is $485k-$390k = $90k capital gain.

    You’re still eligible for the CGT discount, but be aware of the extra tax burden when you sell. A lot of rookie negative ‘gearers’ who refinance and then sell, could find themselves with a larger tax burden because of all the dep. claims over the years, that they suddenly may not be able to pay.

    Invest in good education and good professionals, e.g. an accountant.

    Then

    BS

    Profile photo of ABAB
    Participant
    @ameetvbhat
    Join Date: 2015
    Post Count: 21

    Very well explained Ben..thanks for the example as well. Makes a lot more sense to me(and a lot like me I am sure) now. Any good accountants with a property focus in Melbourne or nearby that anyone could recommend?

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi Ben,

    say you’ve claimed depreciation each year, and it was a new house, so there was $5k worth of dep. each year that you claimed in each tax return. This gets taken off your cost base.

    Just one further question if I may (as this is an area I am quite unsure of) – you mentioned Depreciation needs to be taken off your cost base. Richard mentioned Capital Allowance which is (I believe) not the same as “depreciation”. Isn’t Capital Allowance the cost of building (and yes, renovating) the house and fixtures?

    I can understand a reno ADDING to the Capital Allowance claimed, and yes, that would be done via the Dep schedule. e.g. I don’t believe that Carpet is a Capital item, thus it wouldn’t be adjusting the Cost Base…. OR WOULD IT?

    Extra words around this subject from yourself, or Richard (or anyone else who knows) would be most welcome,

    Benny

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Depreciation has 2 aspects – capital allowance for building works and fixtures and fittings.
    It is only capital allowance that reduces the cost base.

    Also keep in mind that legislation is worded in such a way that even if you did not claim the capital allowance it is used to reduce the cost base if you could have claimed it.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of NanNan
    Participant
    @nano
    Join Date: 2015
    Post Count: 26

    Thanks Ben, thanks Terry.

    Does anyone have good accountant with property focus in Adelaide? Or do anyone use good online accountant who are very good at investment property, etc?

    • This reply was modified 4 years ago by Profile photo of Nan Nan. Reason: add more
    Profile photo of StannisStannis
    Participant
    @ben-stanton0
    Join Date: 2015
    Post Count: 23

    Hey mate, looks like Terry here has already replied.

    That’s my understanding as well.

    I’d advise going in and seeing your accountant, working out your cost base, working out a running position on your cost base, estimate sales pricing and costs, so you know your tax liability.

    That’s what I do for my properties, then it sits in a spreadsheet for when I need to work out what I would bank, after tax and after the mortgage is paid.

    Then you have an accurate net cash on cash return, because you’ve worked out your profit or loss.

    Cheers
    Bs

    Profile photo of StannisStannis
    Participant
    @ben-stanton0
    Join Date: 2015
    Post Count: 23

    Very well explained Ben..thanks for the example as well. Makes a lot more sense to me(and a lot like me I am sure) now. Any good accountants with a property focus in Melbourne or nearby that anyone could recommend?

    Thanks Ben, thanks Terry.
    Does anyone have good accountant with property focus in Adelaide? Or do anyone use good online accountant who are very good at investment property, etc?

    Google Unwin and associates and talk to Mark Unwin. He’s the accountant in Melbourne that took over Steve McKnight and Dave Bradley’s firm. He’s also relatively cheap, about 250 ish an hour or so, he does my accountants, trusts, companies, advice etc. He won’t tear your arm off in costs or get trusts that no one can understand unlike chan and naylor. Give c&n a miss, unless you really want to run those hybrid trusts, but get a second opinion always, you may find you don’t need them.

    Tell Mark I recommended you, Ben Stanton, from this forum, they always like referrals, and it looks good for me too. I don’t receive any incentives or anything like that, I just like to support good trades and professionals.

    I’m in Perth so don’t worry about not being in the same city or state. Mark does a lot for developers, and can scale down to one property or advise on a 10 townhouse project.

    I’ve sacked 4 accountants in the past, Mark is really good.

    Cheers
    Bs

    Profile photo of NanNan
    Participant
    @nano
    Join Date: 2015
    Post Count: 26

    as per above, only capital allowance will add to cost base when on-sell the property. The tax claims from Plant and equipment wont add to cost base. Is this still applied to new budget rule?

    For the new budget rule, plant and equipment depreciation deductions is only for those expenses incurred by investors.

    how do you think it will affect the property market?

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