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Ruling

Subject: CGT - cost base

Questions and answers

Can you include the purchase price of the property in the cost base when calculating your capital gain or capital loss?

Yes.

Can you include the market value of the property in the cost base when calculating your capital gain or capital loss?

No.

Can you include the cost of capital works done to the property in the cost base when calculating your capital gain or capital loss?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012.

The scheme commenced on:

1 July 2011.

Relevant facts and circumstances

You entered into the contract to purchase the property several years ago.

You rented out the property for a number of years.

You did not live in the property prior to renting it out.

You moved into the property after you finished renting it out, and from that time treated it as your main residence.

You obtained a retrospective market valuation as at the time you moved into the property.

You undertook major renovations after moving into the property.

You sold the property.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 110-25.

Income Tax Assessment Act 1997 Section 118-192.

Reasons for decision

A taxpayer makes a capital gain or capital loss only when a capital gains tax (CGT) event happens.

The most common CGT event that happens to real estate is its sale or disposal, which is CGT event A1.

A capital gain is calculated as follows:

capital proceeds less cost base = capital gain

The cost base of an asset is generally what it costs a taxpayer.

The cost base is made up of five elements:

1. money paid for the asset

2. incidental costs of acquiring or selling it

3. cost of owning it

4. cost associated with increasing or preserving its value

5. cost to preserve or defend a taxpayer's title or right to it

Purchase price of property

In your case, you can include the purchase price of the property in element one of the cost base.

You can only include the market value of the property in the cost base instead of the actual money paid for the property if you meet the 'first used to produce income' rule.

'First used to produce income' rule

A taxpayer is taken to have acquired their dwelling for its market value at the time it was first used to produce income, if they meet all the requirements of the 'first used to produce income' rule.

This rule does not apply to you because you would not have got a full exemption from CGT if you had sold the property just before you began renting it out. This is because it was not your main residence until after you stopped renting it out.

Cost of renovations

You can include the cost of the renovations in element four of the cost base, as they are costs associated with increasing the property's value. You must have evidence of the costs incurred in order to include them in the cost base.

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