With summer well and truly upon us, it should come as no surprise that the idea of investing in a holiday home becomes a very real question for a number of Australians – but is it really a good idea?
According to HLB Mann Judd tax partner Peter Bembrick: “While holiday homes are very popular at this time of year, families shouldn’t be naïve in overstating their place as a worthwhile investment.”
He noted that such homes “should be viewed as a lifestyle asset and not one that investors are likely to make a return on in the same way as other investments, such as equities”.
For those investors who are intent on making a holiday home purchase, or already own one, Mr Bembrick did flag the importance of considering CGT “right from the moment of purchase”.
He considered that “one of the most appropriate ways of reducing the amount of CGT incurred is for investors to record non-deductible property costs that can be added to a cost base in reducing the overall CGT”.
“On the basis that no expenditure has been claimed as an income tax deduction and that appropriate receipts have been maintained, the cost base of a property is made up of items ranging from the total of any money you have paid to acquire the asset, incidental costs incurred in acquiring or selling the asset, and non-capital costs of ownership (including cleaning, gardening, repairs, insurance, rates, strata levies and land tax),” he explained.
Other cost base elements investors should be wary of include capital expenditure incurred by purchasing items intended to increase or preserve the asset’s value or that relate to the installation or moving of the asset.
It also includes capital improvements which may or may not be reflected in the current state of the property, as well as costs incurred in establishing, preserving or defending the owner’s title to the asset, Mr Bembrick outlined.
He considered that “all these items should be collectively assessed in determining the best means of mitigating CGT”.
“If property investors are smart, over the Christmas break when people are using holiday or secondary homes, they should start to think about whether any of these factors could be applied as part of their financial and tax planning strategies, and speak to their professional adviser accordingly.”
The tax expert also flagged how incidental costs incurred by an investor in the acquisition or selling off of the asset can often be overlooked.
He said that while “clients will often be across stamp duty and the costs of transfer, areas such as advertising or marketing to find a seller or buyer, search fees relating to a CGT asset, conveyancing kits, borrowing expenses and termination fees should all be cited and factored into lowering your overall level of CGT”.
“Even professional services sought, both when buying and selling, in the form of surveyors, valuers, auctioneers, accountants, brokers, agents, consultants or legal advisers can all help reduce CGT incurred,” he concluded.