Question

On 30 August 1995 Juan bought a rental property. The property cost $1,750,000. He consulted his accountant regarding the purchase and this advice cost him $700 in August 1995. In addition, he paid stamp duty of $52,000 in September 1995. Juan used a loan to acquire the property and paid $1,400 stamp duty on the loan in August 1995. The property was sold in September 2017 for $3,000,000. Costs associated with the sale included commission of $47,000 paid to the real estate agent who sold the property and advertising of $2,600. Both expenses were paid in September 2017. In December 1994 Juan’s next-door neighbour, Skinner, disputed the placement of the fence and considered that some of the land on Juan’s side of the fence was in fact his land. It cost Juan $39,000 in various fees and costs to prove that the fence was correctly placed. Skinner did not pay any of Juan’s costs. Juan incurred a fine of $10,000 imposed by the state government for breaching health and safety laws. Juan also incurred the following expenses in relation to the above property:

·                Interest on the loan over the ownership period totalled $95,000,

·                Insurance costs over the period of ownership costing $48,000,

·                Window on the first storey was repaired in 1999 at a cost of $800,

·                Rates and land tax of $24,000 were paid during ownership of the property,

·           Interest of $13,000 was paid since October 1996 when Juan obtained a personal loan to build on a new room at a cost of $93,000.

Required: Calculate Juan’s cost base for Capital Gains Tax purposes.

Answer 1

1.Cost of house for capital gain tax purposes as follows. However the index of respective year shall be charged to calculate the capital gains. As per question it has only been asked to calculate the cost base of house only, which will be as follows:

Cost of acquisition yr 1995 = $ 1750000

add: Stampduty yr 1995. = $ 52000

Add cost of litigation. =$ 39000

Cost of improvement yr1996. =$ 93000

Window repair yr 1999. =$ 800

cost of house =$1934800

Note following cost incurred shall not be allwed as cost of acquisition

1 stamp duty paid on loan of $1400

2 interest and insurance exp shall not be allowed in capital gains.

3 rent rate and taxes of house also not to be allowed as cost of house.

4 penality amount of $10000 is also not allowed as deduction.

Expenses incurred on litigation which improves the value of house is allowed as part of cost of house i.e $39000

calculation of capital gain ( without indexation)

sales consideration $3000000

less exp on sales. $49600

less cost of acquisition (1) $1934800

capital gains*. $1015600

*Calculated based on cost only. Party is eligible for indexation benifit of respective year. Which varies from country to country.