Real estate investors warned: getvaluation now or pay more tax

Source: Realestate.com.au

Real estate investors have been urged to order an immediate independent valuation of their properties to avoid paying inflated tax charges in the wake of the government’s capital gains shake-up.

Ordering a valuation could save the investors tens of thousands if they ever sold due to a detail buried in the federal budget released last week, an investment adviser claims.

Rasti Vaibhav, a former finance worker turned investment adviser, said a valuation was needed to avoid a trap created in the way the government plans to calculate future capital gains.

Government announced in the federal budget last week it would be scrapping capital gains tax discounts implemented by the Howard government in favour of an indexation system.

But the rules for existing investment properties have some complexities.

Under the budget changes, investors who owned property before budget night will be allowed to split their capital gains calculations under two systems.

The CGT rule will split a gain on an existing investment into two parts: the gain before the changes take effect in July 2027 and any gain after that deadline, which will be taxed under the new indexation system, linked to inflation.

Mr Vaibhav said the danger lies for current landlords lies in how the government will calculate any of the gains after the 2027 deadline.

The Get Rare Properties founder said the government will effectively need to estimate what a property was worth at various points after budget night to determine how much of the gain came under the new system.

Without a valuation, the most likely outcome is a broadbrush approach where gains are averaged out between budget night and the eventual sale date, he said.

Mr Vaibhav said this would be a problem for investors who benefited from the Covid housing boom, when prices in some suburbs exploded by hundreds of thousands of dollars in just a few years.

This kind of market rise is unlikely to be repeated in the coming years and investors who fail to get a valuation could pay tax on gains they never actually made after the new system took place.

“To make that split, the ATO needs a value for the property as at 30 June 2027,” Mr Vaibhav said. “If you don’t have a proper registered valuation, the default approach may simply apportion the gain based on time held.

“The problem is that this can understate how much of the growth actually happened before 2027, especially in markets that have already grown strongly.

“That can make the post-2027 gain look larger, which may mean more tax when you eventually sell.”

This trap could be solved with a valuation, which normally costs around $500, Mr Vaibhav said.

“The purpose of getting a registered valuation is to create stronger evidence of the property’s actual market value at the cut-off date,” he said.

“Importantly, it also gives the investor choice. If the formal valuation gives a better outcome, they can use that.

“If the property happens to grow more strongly after 2027 and the default method produces a better tax result, the investor may choose the default method instead.

“In simple terms: the valuation helps stop the property’s value being under-represented at the changeover date, while also giving you another option when calculating the gain later.”

Mr Vaibhav outlined a hypothetical example of how this difference might play out.

A Sydney house bought by someone in the highest tax bracket for $1m in 2015 and sold for $2m in 2032 would incur $220,000 in capital gains tax without a valuation.

A valuation ordered in 2027 showing a $1.77m value at the time the tax changes were implemented would reduce the capital gains tax charges down to about $181,000, a difference of $39,000.

Mr Vaibhav said investors with properties in markets that had doubled in the past five years such as Perth, Brisbane and Adelaide, along with expensive markets like Sydney, had the most to lose if they didn’t get proof of what their properties were actually worth now.

“The government averaging gains across the entire period could make it appear as though far more of the property’s growth happened after the budget changes than was actually the case.”