“Double whammy" on sale
Question from Lynnette updated on 13th November 2013:
I am in negotiations to sell a rental property and a building inspection has indicated the piles need to be re-done. This property will be subject to a similar amount of depreciation clawback as what the estimated costs are to make good. So is it a case of the expense of the work off-setting the clawback? Or is it a double whammy cost to selling this property? The price I am selling for is more than I purchased, however, the land value increase may well account for most of this. I will be getting further information from my valuer on this also.
Our expert Mark Withers responded:
Hi Lynette, I'll answer your questions two folds, first is depreciation recovery. You're absolutely correct in terms of paying tax on depreciation recovery. Getting a registered valuation and in particular obtaining the current market land versus building split of the valued price is crucial in ascertaining whether the increase was caused by land alone or both land and building values. Redoing the piles, given the nature of this is more of a ‘building structure’ it’s likely to be of treated as capital rather than a deductible expense. However, given that it was picked up as a remedy during the sale negotiation, there may be an argument to suggest it’s a cost associated with the sale of the property. If this is the case, you should be able to reduce the sale price accordingly before calculating the depreciation recovery amount. Please review it with your accountants as they may have more historic facts to argue for/against the above position.Cheers Stephen Tsang for Withers Tsang & Co chartered accountants.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.