Demolishing an old rental property – what are the CGT implications ?

Umbrella Accountants - Property Accountants Brisbane

John & Mary bought a rental property in the year 2000, however are now considering demolishing the house to build a new duplex. The old rental property was built in the late 1980’s, is tired and causing lots of repairs and maintenance costs, and can only now attract low rental returns.

The area is now part of the city’s urban renewal, with many properties in the area being demolished and medium density homes being built.

So John & Mary have decided to demolish the old rental and build a new 3 bedroom, 2 bathroom, double garage duplex on the site to maximise rental returns, capital growth going forward, depreciation deductions, and attract a better class of tenants.

Scrapping is the removal and disposal of any potentially depreciable assets from an investment property. In other words, it is the demolition of any existing structure or fixture onsite that would have been eligible to claim deductions for depreciation.

Essentially, if an item is scrapped the amount that is yet to be written off for a particular asset (the residual value) can generally be claimed as a 100% tax deduction at the time of disposal if Div 40, and CGT implication if Div 43.

Scrapping of depreciable assets can be either plant & equipment (Div 40) or structural (Div43)

John & Mary obtained a quantity surveyor report at the time of purchase back in 2000. As the property was purchased post 7.30pm (EST) on 13 May 1997, there is now a claw back, so the full amount of the Div 43 amount cannot be written off. Any plant & equipment can also be written off.

Example

Purchase property in 2000 for $400,000

The Quantity Surveyor has allocated $275,000 for the land, $100,000 Structural and $25,000 for Plant & Equipment.

The original Plant & Equipment had been depreciated or since replaced with new items being depreciated.

Capital Losses of Demolition

$100,000 structural works Div 43, previously claim - $100,000@2.5%@14yrs = $35,000

$100,000 - $35,000 = $65,000 Written Down Value (WDV)

$20,000 demolition costs.

(50%, as it could be argued other 50% was site preparation for the new duplex)

$75,000 can be claimed as capital losses against other capital gains or carried forward, see also ATO ID 2010/35

Existing Plant & Equipment (Div 40) is valued separately, any value over the (WDV) is assessable in the current year / any value below the WDV is deductible.

New building

New duplex constructed will have its own cost base, separate to the original land value, which will be depreciated and come into play if and when this is sold.

See also - if the units are sold prior to completion of construction - one of the GST traps to the unaware small developers