I’m in the process of preparing to sell a rental property and over the years have been claiming depreciation on the building and plant and equipment. It would appear that I need a clause in the sale contract to specify how much of the sales proceeds relate to buildings and plant and equipment in order to calculate a balancing adjustment on these items on disposal.
I need to clarify. For the rental property I am selling I need to dispose the building and Plant and Equipment WDV (written Down Value) in the Depreciation schedule.
How do I determine the sale proceeds for these items to determine a profit/ loss on disposal?
What I am trying to do is have a consideration equal to the WDV of the building and Plant and fixtures so there is no profit and loss on disposal in the depreciation schedule. Hence the reason for the clause. This is really to protect my own interests and minimise tax. This is totally independent from the CGT calculation.
Could you please assist me with a standard clause?
Is there anything else I need to include in the sale contract as I will be liable for capital gains tax on the property? Note I do not have an ABN.
Answer
Balancing adjustments have not been used for some years and they do not serve your best interests.
Since 1.7.1997 any depreciation and/or capital allowance claimed as a tax deduction reduces the cost base of the asset for CGT calculation purposes.
The purchaser is not likely to be interested in a value for claiming depreciation because although they can claim the building capital allowance (2.5%) … they cannot claim any depreciation on fixtures and fittings on pre-owned residential properties.
In the event this is a commercial property and there is separate movable plant and equipment, then scrap this to get the full tax deduction.
In the event the purchaser may want this plant, take legal advice as to its inclusion on the contract.
Although the cost base is diminished by tax deductions, it’s still advantageous as individuals being assessed on capital gains have a 50% discount on that capital gain if they have held the asset for longer than 12 months.
With respect, this is not independent of the CGT calculation as the depreciation written off to date along with the Div 43 capital allowance (2.5%) reduces the cost base for CGT calculation purposes.
There will be no contention with the buyers as their accountants will be make it clear to them, that no depreciation claims are available on second hand property on the fixtures and fittings.
With regards to the Div 43 capital allowance, they will continue to claim the 2.5% per annum based either on your Quantity Surveyor’s schedule or one they commission.