Building & Pest Inspection For Property You Didn’t Buy
Property Purchased = Cost Base for Capital Gains Purposes
You probably already know that the Building and Pest Inspection (and also your Conveyancing Costs) form part of your Cost Base for Capital Gains purposes.
This means unfortunately that you do not receive an immediate tax deduction for them, but that they reduce your capital gain when you sell.
For some property investors that means that the Tax Benefit of these costs may not be received in their lifetimes (for example when you die with investmetn properties that you own.
Property Not Purchased = No Deduction
When you don’t go ahead with a property after you have incurred costs (such as Building & Pest) then those costs would technically still be capital, but because there is no capital asset to attach them to, they do not become a capital loss, but instead become “Lost” – in that you cannot claim them anywhere.
While this seems very unfair, one thing to point out is that if the Building and Pest Inspection report stops you from purchasing a property then it has done it’s job and that is something to be thankful for.
Property Not Purchased in a Company = No Deduction, but no Loan Effect
A client was purchasing a property in a company that didn’t proceed. As above, we advised them that no deduction was allowed.
An internal question our team had was whether the transactions should be put to the Directors’ Loan account as a personal transaction.
The answer to this question is No, that it is just an add back in the tax return and not added to the Directors’ loan account because there is no personal benefit to the Director as the property was to purchased by the company (a company asset) and used company funds.
Property Not Purchased, Planned to Purchase in Trust = No Deduction, Can be Credited to Loan account if Paid By Related party
Likewise if property costs were paid (say the property was to be purchased in a trust) were paid by an Individual personally – they would be able to be added into the (in this case) Trusts accounts as an expense and credited to the related party Loan account (as a non-deductible expense paid for by the related party).
Property Developer/Property Business – Claimable as Cost Of Sales (Trading Stock Expenses)
If an entity is a property developer or similar property business that is in the business of purchasing properties as Trading Stock (as opposed to Capital Gains which is the default position) – then the costs incurred would be able to be claimed as Costs of Goods Sold. In this case the sale of the property would be taxed as regular income rather than capital gain.
Other articles on the internet
Michael Yardley and Margaret Lomas are two property experts that I have read their books over the last 20 years.
While I don’t believe they are individually tax agents (and so may not be authorised to provide tax advice) – they provide similar responses to above.
Michael Yardley – https://propertyupdate.com.au/pest-building-inspection-tax-deductible/
Margaret Lomas – https://www.urban.com.au/expert-insights/finance/38772-is-a-building-inspection-tax-deductible-if-i-didn-t-buy-the-house-ask-margaret