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  • CGT when selling your rental property

    When you sell or dispose of a rental property you may make a capital gain or loss.

    A capital gain or loss is the difference between what it cost you to obtain and improve the property (the cost base) and the amount you receive when you dispose of it.

    The application of a capital gain or loss depends on when you acquired the property:

    • If you acquired the property before 20 September 1985 then it will only apply to certain capital improvements made after that date.
    • If you acquired the property after 20 September 1985, then it will apply to the entire property.

    On this page:

    How capital gains or losses apply

    If you make a:

    • net capital gain in an income year, you'll generally be liable for capital gains tax (CGT)
    • net capital loss, you can carry it forward and deduct it from your capital gains in later years.

    Your capital gain or loss may be disregarded if a rollover applies – for example, if your property was destroyed or compulsorily acquired, or you transferred it to your former spouse under a family law settlement.

    If you're a co-owner of the property, you'll make a capital gain or loss in accordance with your ownership interest in the property.

    Watch: Selling your rental property

    Media: Selling your rental property
    http://tv.ato.gov.au/ato-tv/media?v=bd1bdiubfs6pgxExternal Link (Duration: 2:46)

    Working out the cost base

    The cost base and reduced cost base of a property include the amount you paid for it together with some incidental costs associated with acquiring, holding and disposing of it (such as legal fees, stamp duty and real estate agent’s commissions).

    It does not include amounts that you've claimed or plan to claim as a tax deduction.

    When you sell your rental property, the time of the event (the time at which you make a capital gain or loss) is when you enter into the contract, not when you settle.

    Watch: Selling a rental property that was your home

    Media: Selling a rental property that was your home
    http://tv.ato.gov.au/ato-tv/media?v=bd1bdiubfs6pgqExternal Link (Duration: 3:17)

    Example: capital gains on the sale of a co-owned rental property

    Karl and Louisa bought a residential rental property in November 2015 for a purchase price of $750,000.

    They incur costs of purchase, including stamp duty and legal fees of $30,000.

    After purchase they improved the property by constructing a fence for $6,000.

    Over the five years of ownership of the property, they claimed $25,000 (average $5,000 per year) in decline in value deductions and $35,000 (average $7,000 per year) in capital works deductions.

    In November 2017 they sold the property for $900,000. Their costs of sale, including legal fees, were $10,000.

    A + B + C − D − E + F = Cost base

    Where:

    • A is the purchase price
    • B is the costs of the purchase
    • C is the cost of property improvements
    • D is the decline in value deductions
    • E is the capital works deductions
    • F is the legal fees

    $750,000 + $30,000 + $6,000 − $25,000 − $35,000 + $10,000 = $736,000

    The capital gains outcomes are:

    Proceeds − Cost base = Capital gain outcome

    $900,000 − $736,000 = $164,000

    As the property has been owned for more than a year, the discount capital gain rules reduce the capital gain to $82,000.

    Karl and Louisa owned the property jointly. This means that they each have a capital gain of $41,000 which they will need to put in their tax return for the year in which the contract to sell the property was made, being the 2019–20 year.

    End of example

    See also:

    Capital expenses

    Expenses you incur when purchasing, acquiring, selling, or disposing of your rental property are capital expenses. You may be able to include capital expenses when calculating the 'cost base' of your property. This can help you reduce the amount of CGT you pay when you sell your property.

    Capital expenses include:

    • conveyancing costs paid to a conveyancer or solicitor
    • title search fees
    • valuation fees (when it's a private valuation conducted by your solicitor)
    • stamp duty on the transfer of the property.

    Example: capital expenses

    Stephen recently purchased a rental property that needed repairs before the tenants moved in. He paid tradespeople to:

    • repaint dirty walls
    • replace broken light fittings
    • repair doors on two bedrooms.

    The house was also treated for damage by white ants.

    Because Stephen incurred these expenses to make the property suitable for rent (not while he was using the property to generate rental income), these expenses are capital expenses.

    End of example

    Depreciating assets

    If the sale of your rental property includes depreciating assets, you’ll need to apportion your capital proceeds between the property and the depreciating assets.

    When you sell a depreciating asset, a ‘balancing adjustment event’ occurs. This means you need to calculate a balancing adjustment amount to include in your assessable income or to claim as a deduction.

    Watch: Claiming depreciating assets

    Media: Claiming depreciating assets
    http://tv.ato.gov.au/ato-tv/media?v=bd1bdiun85ity3External Link (Duration: 2:19)

    See also:

    GST on rental properties

    Generally, the sale of existing residential premises is input taxed. This means:

    • you can't claim GST credits on any costs associated with buying or selling
    • GST doesn't apply to the rental payments you receive.

    However, if you build new residential premises for sale, you may be liable for GST on the sale. You may also be entitled to GST credits on construction and sale costs, even if the premises have been rented for a period before being sold.

    See also:

    Last modified: 01 Jul 2020QC 22172