CGT events affecting real estate
The most common capital gains tax (CGT) event that happens to real estate is its sale or disposal. Certain events apply only where real estate is leased (see CGT events involving leases). Other CGT events affecting real estate are detailed below.
Entering into a terms contract
CGT event B1 happens to real estate if you enter into an agreement where the new owner is entitled to possession of the land or the receipt of rents and profits before becoming entitled to a transfer or conveyance of the land.
Where this happens under a contract, it is known as a terms contract and the new owner usually completes the purchase by paying the balance of the purchase price and receiving the instrument of transfer and title deeds.
It may also happen where an agreement is made with a relative or other party to use and enjoy the property for a specified period, after which the title to the property passes to them. It will not happen where, under an arrangement, title to a property may pass at an unspecified time in the future.
CGT event B1 happens when use and enjoyment of the land is first obtained by the new owner. Use and enjoyment of the land from a practical point of view takes place at the time the new owner gets possession of the land or the date the new owner becomes entitled to the receipt of rents and profits.
If the agreement falls through before completion, and title to the land does not pass to the acquirer, you may be entitled to amend your assessment for the year in which CGT event B1 happened.
If an asset is lost or destroyed
CGT event C1 happens if an asset is lost or destroyed. This event may happen if, for example, a building on your land is destroyed by fire. Your capital proceeds for CGT event C1 happening include any insurance proceeds you may receive for the loss or destruction. The market value substitution rule for capital proceeds that generally applies if you receive no capital proceeds does not apply if CGT event C1 happens. For more information, see Involuntary disposal of a CGT asset.
Granting a right to reside
CGT event D1 happens if you give someone a right to reside in a dwelling. The capital proceeds include money (but not rent) and the value of any property you receive. The CGT discount does not apply to CGT event D1.
The market value substitution rule for capital proceeds applies if:
- the amount of capital proceeds you receive is more or less than the market value of the right, and
- you and the person you granted the right to were not dealing with each other at arm’s length in connection with the event.
Granting, renewing or extending an option
CGT event D2 happens if you grant an option to a person or an entity, or renew or extend an option that you had granted.
The amount of your capital gain or capital loss from CGT event D2 is the difference between what you receive for granting the right and any expenditure you incurred on it. The CGT discount does not apply to CGT event D2.
Granting of an option
You were approached by Colleen, who was interested in buying your land. On 30 June 2015, you granted her an option to purchase your land within 12 months for $200,000. Colleen pays you $10,000 for the grant of the option. You incur legal fees of $500. You made a capital gain in the 2014–15 income year of $9,500.
End of example
Exercise of an option
If the option you granted is later exercised, you ignore any capital gain or capital loss you made from the grant, renewal or extension. You may have to amend your income tax assessment for an earlier income year.
Similarly, any capital gain or capital loss that the grantee would otherwise make from the exercise of the option is disregarded.
The effect of the exercise of an option depends on whether the option was a call option or a put option. A call option is one that binds the grantor to dispose of an asset. A put option binds the grantor to acquire an asset.
Granting of an option (continued)
On 1 February 2016, Colleen exercised the option you granted her. You disregard the capital gain that you made in the 2014–15 income year and you request an amendment of your income tax assessment to exclude that amount. The $10,000 you received for the grant of the option is considered to be part of the capital proceeds for the sale of your property in the 2015–16 income year. Your capital gain or capital loss from the property is the difference between its cost base or reduced cost base and $210,000.
End of example
Entering into a conservation covenant
CGT event D4 happens if you enter into a conservation covenant after 15 June 2000 over land that you own and if you receive capital proceeds for entering into the covenant.
From 1 July 2002, CGT event D4 also happens if you receive no capital proceeds for entering into the covenant and you can claim a tax deduction for entering into the covenant. One of the conditions for a tax deduction is that the covenant is entered into with a deductible gift recipient or an Australian Government agency (that is, the Commonwealth, a state, a territory or one of their authorities).
A 'conservation covenant' is a covenant that:
- restricts or prohibits certain activities on the land that could degrade the environmental value of the land
- is permanent and binding on current and future land owners (by way of registration on the title to the land where possible)
- is approved by the Environment Minister (including those entered into under a program approved by that Minister).
If CGT event D4 happens, you calculate your capital gain by comparing your capital proceeds from entering into the covenant with the portion of the cost base of the land that is attributable to the covenant.
Similarly, you calculate your capital loss by comparing your capital proceeds from entering into the covenant with the portion of the reduced cost base of the entire land that is attributable to the covenant.
Note: The market value substitution rule for capital proceeds that generally applies if you receive no consideration for a CGT event does not apply if CGT event D4 happens. Instead, the capital proceeds are equal to the amount you can claim as a tax deduction for entering into the covenant.
Calculate the relevant portion of the cost base or reduced cost base attributable to the covenant using this formula:
Cost base (reduced cost base)
capital proceeds from entering into the covenant over land
those capital proceeds plus the market value of the land
just after you enter into the covenant
As the conservation covenant will affect the value of the entire land, you must use the cost base of the entire land in calculating the cost base apportioned to the covenant. This is the case even if the covenant specifically states within its terms that the restrictions on use only apply to part of the land.
Note: CGT event D4 will not happen if you receive no capital proceeds and the conditions for a tax deduction for entering into the covenant are not satisfied. In that case, CGT event D1 will apply.
For help applying this to your own situation, phone 13 28 61.
Capital gains tax events affecting real estate can include entering into a terms contract, granting a right to reside, granting, renewing or extending an option, exercising an option or entering into a conservation covenant.