What is a real estate valuation and how to calculate it?


Property appraisals can play an important role in the process of buying and selling homes in Australia. Canstar talks to Tuan Duong, founder of Duo Tax, to find out why and when you might need it.




In this article, Tuan Duong, founder of Duo Tax, gives us some insight into real estate appraisals and when you might need them.




What is a real estate valuation?




The purpose of a real estate appraisal is to identify the approximate value you can expect to sell a property for and to estimate what the market thinks your property is worth at any given time.




Real estate appraisers typically record their findings in a real estate appraisal report that includes the following details:




  • how the assessment was carried out
  • a description of the property in question
  • market and sales data of similar properties
  • property valuation calculations







Why consider a real estate appraisal?




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 willing to spend on that property, or how much it’s worth now versus when you were. bought it for the first time. . Real estate appraisals can also identify potential tax liabilities associated with each individual sale, so it can be helpful to understand the types of real estate appraisals that exist.




When can I need a property appraisal?




There are several reasons a person may need a property appraisal:




  • Stamp duty: Real estate appraisals can help establish stamp duty charges in cases where you are transferring property between owners and owning entities such as trusts.
  • Capital gains assessments: In some cases, the Australian Taxation Office (ATO) may require you to use a property valuation to calculate the capital gain you may have realized or to which you were entitled on the sale of your investment property.
  • Market Valuation Ratings: you may need to assess the fair market value of your property to help you establish a reasonable selling price in an open and competitive real estate market.
  • Retrospective assessments: If you need to assess the value of a property at a given time, backdated or historical property appraisals can be useful.
  • curbside ratings: Generally faster and cheaper than a full appraisal, a curbside appraisal can sometimes be used to check the condition of a property in cases where it is not necessary to inspect the interior of the property. property.








How is a real estate appraisal different from a real estate appraisal?




A real estate appraisal is an informal estimate usually offered by a real estate agent, usually free of charge. It is usually based on recent sales statistics and is not legally enforceable. On the other hand, real estate appraisals are carried out by qualified and licensed appraisers, who produce legally binding reports based on various appraisal factors.




Since there is an element of legal liability, real estate appraisers should exercise due diligence in their appraisals and provide as accurate information as possible. Although a real estate appraisal can help establish what you could potentially sell your property for, the report is not a legal document and does not necessarily provide accurate market value figures.




How to calculate a real estate estimate?




To calculate the value of a particular property, a real estate appraiser does extensive research and usually considers the following factors:




  • the size of the property
  • the number and type of bedrooms (for example, are two bedrooms and one room better suited to a home office?)
  • all plant and equipment assets (such as property fixtures and fittings)
  • the frame of the building
  • the location of the property and surrounding amenities
  • local council zoning
  • recent sales in the same sector
  • market conditions.




What is market value for tax purposes?




The market value in an appraisal report is the real estate expert’s estimate of the fair market price of your property, which establishes a reasonable sale price in an open and competitive real estate market. A market valuation is generally used to help establish the highest price a buyer would be willing to pay or a seller would be willing to accept.




However, the ATO requires taxpayers to obtain a market valuation for tax purposes in certain cases. For example, you will need the market value of a property for transfers of real estate or shares between related parties (such as family members) to determine stamp duty liability. For real estate developers, market value is sometimes used under the GST margin regime.








Who can I call on as a real estate appraiser?




For the most accurate and efficient property appraisal report, you will need a qualified property appraiser to perform your appraisal. Check whether your property appraiser is registered as a Certified Practicing Valuer (CPV) and whether or not they are a member of the Australian Property Institute – this should give you a good indication of their expertise.




A starting point might be to speak with a company that specializes in real estate appraisal. For example, at Duo taxwe have assembled a team of real estate appraisers who have been certified as practicing appraisers by the Australian Property Institute.




What assessment methods are available?




There are generally three types of valuation methods used by property appraisers in Australia:




  • Comparison method: This is the most common valuation method used by real estate appraisers 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 or around your area. The real estate expert uses this information to determine a base value and then makes any necessary adjustments based on the fundamental differences between the properties.
  • Replacement cost approachAlso known as the summation method, the replacement cost approach considers sales comparisons and the replacement cost of the property in light of current costs in the area for similar building types. Appraisers using this method will generally also take into account the depreciation of the building.
  • Income-based approach: some real estate experts establish the value of the property on its ability to generate income. This approach is generally used for commercial and industrial properties and can be used for investment properties.




What taxpayer penalties can apply to appraisals?




The ATO has strict rules for deficient property valuations – particularly if the property valuation is used for tax purposes such as calculating capital gains tax and stamp duty. Any taxpayer who undertakes their own real estate appraisals or uses the appraisals of unqualified real estate experts may end up paying administrative penalties if the appraisal is found to be deficient.




Why are real estate appraisals important?




Real estate appraisals establish the value of a property based on a realistic appraisal, usually done by a real estate appraiser and based on various market conditions. Real estate appraisals differ from real estate appraisals in that they are more comprehensive and legally enforceable.




You may simply want an accurate value to help you decide what price you should sell your property at or what price you should offer as a potential buyer. In other cases, the ATO may require it for tax purposes.




Either way, it’s usually best to make sure you get your hands on a real estate appraisal report that a qualified and expert real estate appraiser has completed. If you don’t, you could be subject to ATO penalties if the assessment is found to be deficient.








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About Tuan Duong

Tuan DuongTuan is the director and founder of Duo tax quantity surveyors. His passion is educating real estate investors on the power of tax depreciation and the benefits it can provide in helping them minimize their tax liability.

Tuan is also a professional member of the Australian Institute of Quantity Surveyors and is a registered tax agent, authorized to offer advice on all matters relating to depreciation.