19 April 2021

Capital Gains Tax Property Valuation: Why Every Investor Needs One

Written by Tuan Duong
Founder & Director

A capital gains tax property valuation is required by the Australian Tax Office (ATO) to calculate the capital gain you may have made on the sale of your investment property. 

Valuations are required for several tax reasons. For capital gains tax purposes, a valuation is used to set the cost base.

While it is an ATO requirement to have a capital gains tax property valuation, it’s also beneficial for you as an investor to take advantage of an increased cost base. The higher the cost base, the less capital gain you’ll have to report. 

Understanding how to use a capital gains tax property valuation to your benefit can be a bit confusing, especially with all the property jargon involved. 

So, we’ve created this guide to help you understand what a capital gains tax property valuation is and how you can get your hands on one. 

What is Capital Gains Tax?

Before delving into capital gains tax property valuations, you should have a foundational understanding of capital gains tax. 

When you sell your property, the difference between how much you paid for it and how much you sold it for is either known as a capital gain or a capital loss. 

According to the ATO, if you profit from your investment property’s sale, that profit is considered a capital gain and must be declared on your income tax return. 

The tax you have to pay on your capital gain is known as capital gains tax or CGT.

Capital Gains Tax Exemptions

However, the ATO allows property investors to avoid (or at least significantly reduce) their capital gains tax liability if they fall into one of the CGT exemption and concession categories. 

These include: 

What Is a Capital Gains Tax Property Valuation?

The ATO requires property investors to submit a capital gains tax property valuation report to establish the capital gain they may have made on the sale of your investment property. 

Essentially, a capital gains tax property valuation report is used to help identify the capital increase or decrease of your property asset. 

While submitting a capital gains tax property valuation may be an ATO requirement, an accurate valuation can also be crucial in making sure that you don’t pay more tax than you need. 

Factoring in all of the expenses that occur when purchasing, acquiring or selling the property can significantly increase your cost base and, in turn, reduce the amount of capital gain you have to declare. 

Yet, so many investors miss out on the opportunity to take these expenses into account and reduce their profit for tax purposes. 

What Is a Property’s Cost Base?

Remember, a capital gain = selling price - cost base.

The property’s cost base includes the purchase price and expenses less any grants and depreciation: 

 cost base = purchase price + expenses (see below) - (grants + depreciation)

By adding expenses to your cost base, you’ll end up reducing the capital gains you declare on your annual income tax return.

Cost Base Expenses

  • Incidental Costs: legal fees, stamp duty and, among other expenses, rental advertisement fees
  • Ownership Costs: expenses incurred when searching and inspecting properties
  • Title Costs: the expense incurred through the registration of your property's title to the Land Titles Office in your state or territory. 
  • Improvement costs: renovations and repairs 

Example:

Property Investor A sells his investment property to Property Investor B for $725,000. 

Property Investor A originally purchased the property for $515,000. So, the property was evaluated for capital gains tax purposes, it would be evident that they made a capital gain of $210,000. 

However, Property Investor A orders a Duo Tax Capital Gains Valuation Report to factor in any relevant expenses on his cost base. 

Based on the Duo Tax Capital Gains Valuation Report, the following expenses were added to their cost base: 

  • Incidental costs and stamp duty: $23,510
  • Title costs: $1,200
  • Renovations: $83,260

After taking into account these expenses, Property Investor A’s capital gain is as follows: 

Cost base = $515,000 + ($23,150 + $1,200 + $83,260) = $622,970

Capital gain = $725,000 - $622,970 = $102,030 

$102,030 x 50% (because they have owned the property for more than 12 months) = $51,015

So, Property Investor A only needs to declare $51,015 (instead of $210,000) on their income tax return to reflect their capital gain. 

Note: our property valuation reports offer both existing and retrospective capital gains tax property valuations to help calculate the tax you pay on your property’s capital gain.

What Is a Retrospective Capital Gains Tax Property Valuation?

A retrospective capital gains tax property valuation is a valuation of a property at a specific time in the past. 

As your capital gains tax liabilities will depend on the property’s increase in value from the time it was purchased or first used as an investment property to the time it is being sold, it may be necessary to conduct a retrospective capital gains tax property valuation - especially if you’re unsure whether the price in the original sale agreement was an accurate valuation. 

Another example of where a retrospective capital gains tax property valuation would be used is if the investment property had extensive renovations completed and no record of those costs. 

Because the renovation expenses can affect the current valuation figures in contrast to the original date, these changes must be taken into account. 

Key Takeaways 

A capital gains tax property valuation report records whether there was a capital increase or decrease of your investment property. 

This is generally required by the ATO when declaring the capital gain on your annual tax return. However, by identifying capital expenses, a capital gains tax property valuation can also play a vital role in reducing the amount of capital gain you declare and ultimately the amount of tax you’ll end up paying. 

Because a property valuation typically requires a thorough inspection of the property and its costs, you’ll need an expert property valuer to produce the report for you. 

Duo Tax has assembled a team of property valuation experts with the single mission of helping you with all manners of property valuation.

We offer both existing and retrospective capital gains tax property valuations to help calculate the tax you pay on your property’s capital gain.

To get the best possible advice on your CGT options and to enquire about our Capital Gains Report and capital gains tax property valuation, get in touch with us today.

Disclaimer: Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek a second professional opinion for any legal or tax issues raised in your investing affairs.
Tuan Duong is an award winning Quantity Surveyor and leads Duo Tax Quantity Surveyors – Australia’s fastest growing provider of Tax Depreciation. Reach out to him directly on 0431 154 356 or email tuan@duotax.com.au
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