What is a property valuation and how do you calculate it?

In this article, Tuan Duong, founder of Duo Tax, gives us a rundown of property valuations and when you might need one.

What is a property valuation?

The purpose of a property valuation is to identify the approximate value that you can expect a property to sell for and what the market proposes your property is worth at that particular time. 

Property valuers typically record their findings in the property valuation report that details: 

• How the valuation was conducted
• A description of the property in question
• Market and sales data of similar properties
• property valuation calculations

When might I need a property valuation?

There are various reasons why you could 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: you’re required by the Australian Tax Office (ATO) to calculate the capital gain you may have made on the sale of your investment property.  
• Market assessment valuations: you may need to gauge the fair market value of your property to 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: can 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 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, property valuers are expected to apply due diligence in their valuation and provide information that is as accurate as possible. 

While real estate appraisals 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 takes into account the following factors: 

• The size of the property
• Number and type of bedrooms (for example, are there two bedrooms and one room better suited to a home office?)
• Plant and equipment assets (such as the property’s fixtures and fittings)
• The building structure
• 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 is the fair market price of your property and establishes a reasonable selling price in an open and competitive property market. A market valuation is usually used to establish the highest price the buyer would be willing to pay, and the seller would be willing to accept. 

The ATO sometimes requires taxpayers to obtain a market valuation for tax purposes. For example, you’ll need the market value of a property for transfers of real estate or shares between related parties to work out the stamp duty liability. For property developers, the market value establishes the GST margin scheme. 

Who can I use as a property valuer?

For the most accurate and efficient property valuation report, it can be worthwhile to have a qualified property valuer conduct your valuation. 

You can check to see if your property valuer is certified with the Certified Practising Valuers (CPV) board and whether or not they are members of the Australian Property Institute – that will give you a good indication of their expertise. 

At Duo Tax, we’ve assembled a team of property valuers who have been certified as practising valuers through the Australian Property Institute.

We provide a comprehensive suite of property valuation services across Australia designed to deliver reliable and affordable valuation reports for your property.

What valuation methods are available?

There are generally three types of valuation methods that property valuers use: 

• 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 as 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 in light of the current costs in the area for similar types of buildings. Valuers will generally take depreciation of the building into account as well.  
• Income-Based Approach: some property valuers establish the 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.

If you want to know more, it is advisable to consult with a qualified tax professional.

Why are property valuations important?

Property valuations establish a property’s value based on a realistic assessment, usually conducted by an expert valuer’s property in relation to various market conditions. 

You may just want an accurate value to help you decide what you should be selling your property for in some instances. In other cases, the ATO requires it for tax purposes. 

Either way, 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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