Why do you need a market valuation?
Selling or gifting real estate is a capital gains tax event (CGT event). Your liability for capital gains tax arises when a CGT event happens to your property.
For most CGT events, your capital gain or capital loss is the difference between your capital proceeds (what you receive when you dispose of the property) and the cost base (your costs of ownership of the property).
However, if you receive nothing in exchange for your property (for example, if you give it away as a gift) you are taken to have received the market value of the property at the time of the CGT event.
You may also be taken to have received the market value if:
- what you actually received (your capital proceeds) is more or less than the market value of the property
- you and the new owner were not dealing with each other at arm’s length in connection with the event, such as where property is transferred between family members.
You are said to be dealing at arm’s length with someone if each party acts independently and neither party exercises influence or control over the other in connection with the transaction. The law looks at not only the relationship between the parties, but also the quality of the bargaining between them.
In these cases, the market value of the property on the day of the transfer replaces what you actually received for it.
Dan is delighted to find out that his son and daughter-in-law, Chris and Maria, are expecting their first child. He realises the one-bedroom flat Chris and Maria are renting is not going to be big enough once the baby comes, and the money they have been saving towards a deposit on a house is not nearly enough. The lease on the rental property Dan owns is due for renewal and he only owes $120,000 on the mortgage. Dan makes Chris and Maria an offer to sell them his rental property for the balance owing on the mortgage. Chris and Maria accept his offer and purchase the property for $120,000.
Dan obtains a market valuation from a professional valuer. It shows the value of the property at the time of transfer was $250,000.
Despite Dan selling the property for less than market value to a family member, the $250,000 market value is his capital proceeds when calculating his capital gain or capital loss.
End of example