In this article, Tuan Duong, Founder of Duo Tax, gives us a rundown on property valuations and when you might need one. He speaks to Canstar about:
- What is a property valuation?
- Why should I consider a property valuation?
- When might I need a property valuation?
- How is a property valuation different to a property appraisal?
- How do you calculate a property valuation?
- What is market value for tax purposes?
- Who can I use as a property valuer?
- What valuation methods are available?
- What taxpayer penalties can apply with valuations?
- Why are property valuations important?
What is a property valuation?
The purpose of a property valuation is to identify the approximate value you can expect a property to sell for, and to estimate what the market thinks your property is worth at a particular time.
Property valuers typically record their findings in a property valuation report that includes the following details:
- the manner in which the valuation was conducted
- a description of the property in question
- market and sales data of similar properties
- property valuation calculations
Why should I consider a property valuation?
Whether you’re in the market to buy a property or looking to sell your current home, understanding its value can help you decide what you’re prepared to spend on that property, or how much it’s worth now compared with when you first bought it. Property valuations can also identify the potential tax obligations associated with each individual sale, so it can be worthwhile understanding the types of property valuations out there.
When might I need a property valuation?
There are a number of reasons why a person might need a property valuation:
- Stamp duty: property valuations can help establish stamp duty costs in instances where you’re transferring property between owners and ownership entities such as trusts.
- Capital gains valuations: in some cases, you may be required by the Australian Taxation Office (ATO) to use a property valuation in calculating the capital gain you may have made or been entitled to on the sale of your investment property.
- Market assessment valuations: you may need to gauge the fair market value of your property to help you establish a reasonable selling price in an open and competitive property market.
- Retrospective valuations: if you need to assess the value of a property at a certain point, backdated or historical property valuations can be helpful.
- Kerbside valuations: generally quicker and cheaper than a full valuation, a kerbside valuation can sometimes be used to check the condition of a property in instances where it’s unnecessary to inspect the inside of the property.
How is a property valuation different to a property appraisal?
A property appraisal is an informal valuation usually offered by a real estate agent, usually free of charge. It’s generally based on recent sales statistics and is not legally enforceable. On the other hand, property valuations are carried out by qualified and licensed valuers, who produce legally enforceable reports based on various assessment factors.
Because there is an element of legal liability involved, property valuers are expected to apply due diligence in their valuations, and to provide information that is as accurate as possible. While a real estate appraisal can help establish what you could potentially sell your property for, the report is not a legal document and doesn’t necessarily provide accurate market value figures.
How do you calculate a property valuation?
To calculate a particular property’s value, a property valuer conducts thorough research and typically takes into account the following factors:
- the size of the property
- the number and type of bedrooms (for example, are there two bedrooms and one room better suited to a home office?)
- any plant and equipment assets (such as the property’s fixtures and fittings)
- the building structure
- the property’s location and surrounding amenities
- local council zoning
- recent sales in the same area
- market conditions.
What is market value for tax purposes?
The market value in a valuation report is the property valuer’s estimation of the fair market price of your property, which establishes a reasonable selling price in an open and competitive property market. A market valuation is usually used to help establish the highest price a buyer would be willing to pay, or that a seller would be willing to accept.
However, the ATO requires taxpayers to obtain a market valuation for tax purposes in some instances. For example, you’ll need the market value of a property for transfers of real estate or shares between related parties (such as family members) to work out stamp duty liability. For property developers, the market value is sometimes used as part of the GST margin scheme.
Who can I use as a property valuer?
For the most accurate and efficient property valuation report, you’ll want a qualified property valuer to conduct your valuation. Check to see if your property valuer is registered as a Certified Practising Valuer (CPV) and whether or not they are members of the Australian Property Institute – that should give you a good indication of their expertise.
One place to start could be by speaking with a firm that specialises in property valuation. For example, at Duo Tax, we’ve assembled a team of property valuers who have been certified as practising valuers through the Australian Property Institute.
What valuation methods are available?
There are generally three types of valuation methods that property valuers use in Australia:
- Comparison method: this is the most common valuation method among property valuers when establishing the value of land and residential buildings. As the name suggests, this method compares your property with recent sales of similar properties in your area or areas nearby. The property valuer uses this information to work out a foundation value and then makes necessary adjustments based on fundamental differences between the properties.
- Replacement cost approach: also known as the summation method, the replacement cost approach considers sales comparisons and the replacement cost for the property in light of the current costs in the area for similar types of buildings. Valuers using this method will generally take depreciation of the building into account as well.
- Income-based approach: some property valuers establish the property’s value on its ability to produce income. This approach is typically used for commercial and industrial properties and can be used for investment properties.
What taxpayer penalties can apply with valuations?
The ATO has strict rules for deficient property valuations – especially if the property valuation is used for tax purposes such as calculating capital gains tax and stamp duty. Any taxpayers who undertake their own property valuations or use valuations from unqualified property valuers may end up paying administrative penalties if the valuation proves to be deficient.
Why are property valuations important?
Property valuations establish a property’s value based on a realistic assessment, usually conducted by an expert property valuer and based on various market conditions. Property valuations differ from property appraisals in that they are more comprehensive and legally enforceable.
You may just want an accurate value to help you decide what you should be selling your property for, or how much you should offer for it as a prospective buyer. In other cases, the ATO may require it for tax purposes.
Either way, it’s generally best to make sure you get your hands on a property valuation report that a qualified, expert property valuer has completed. If you don’t, you could end up being liable for ATO penalties if the valuation ends up being deficient.
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