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  • Sale of a rental property

    Example 54 shows how you would calculate your capital gain on the sale of your rental property.

    The sample worksheet (PDF 95KB)This link will download a file shows how you would complete the Capital gain or capital loss worksheet for this example.

    Example 54: Sale of a rental property

    Brett purchased a residential rental property on 1 July 1998. The price he paid was $150,000, of which $6,000 was attributable to depreciating assets. He also paid $20,000 in total for pest and building inspections, stamp duty and solicitor’s fees.

    In the next few years, Brett incurred the following expenses on the property:

    interest on money borrowed

    $10,000

    rates and land tax

    $8,000

    deductible (non-capital) repairs

    $15,000

    Total

    $33,000

    Brett cannot include the expenses of $33,000 in the cost base, as he was able to claim a deduction for them.

    When Brett decided to sell the property, a real estate agent advised him that if he spent around $30,000 on major structural improvements, the property would be valued at around $500,000. The major structural improvements were completed on 1 October 2020 at a cost of $30,000.

    On 1 February 2021, he sold the property for $500,000 (of which $4,000 was attributable to depreciating assets).

    Brett could not claim any capital works deductions for the original construction costs, as construction of the property began before 18 July 1985. However, he could claim a capital works deduction of $255 ($30,000 × 2.5% × 124 ÷ 365) for the major structural improvements.

    For information about capital works that qualify for a deduction, see Rental properties 2021 (NAT 1729). For information about how capital works deductions affect the CGT cost base, see Cost base adjustments for capital works deductions.

    This is Brett’s only capital gain for the year, and he has no capital losses to offset from this income year or previous years.

    Brett works out his cost base as follows:

    purchase price of property (not including depreciating assets)

    $144,000

    plus

    pest and building inspections, stamp duty and solicitor's fees on purchase of the property

     

    $20,000

    capital expenditure (major structural improvements) $30,000 less capital works deduction $255

    $29,745

    real estate agent’s fees and solicitor’s fees on sale of the property

    $12,500

    Cost base unindexed

    $206,245

    Brett deducts his cost base from his capital proceeds (sale price):

    proceeds from selling the house (not including depreciating assets)

    $496,000

    less

    cost base unindexed

     

    $206,245

    Equals

    $289,755

    He decides the discount method will give him the best result, so he uses this method to calculate his capital gain:

    $289,755 × 50% = $144,877

    Brett writes $144,877 at A item 18 on his tax return (supplementary section).

    Brett writes $289,755 at H Total current year capital gains item 18 on his tax return (supplementary section). Brett must also make balancing adjustment calculations for his depreciating assets. Because he used the property 100% for taxable purposes, he will not make a capital gain or capital loss from the depreciating assets.

    End of example

    Investing in affordable housing

    An additional CGT discount of up to 10% is allowed to Australian resident individuals who invest in affordable housing.

    A property qualifies as 'affordable' housing if rent is charged at below market rate, and it is made available for eligible tenants on low to moderate incomes. The property must be managed by an eligible community housing provider (CHP).

    Only dwellings that are Australian residential premises can be used to provide affordable housing. Commercial residential premises do not qualify as affordable housing. Caravans, mobile homes and houseboats are not considered residential premises.

    The additional affordable housing capital gain discount applies to CGT events occurring on or after 30 December 2020.

    Eligibility for the affordable housing CGT discount

    The following conditions must be met to qualify for up to 10% additional capital gain discount for investing in affordable housing:

    • residential premises - the dwelling is Taxable Australian Real Property (TARP) and is residential premises that is not commercial residential premises and is tenanted or available to be tenanted
    • property management - the tenancy of the dwelling or its occupancy is exclusively managed by an eligible CHP
    • affordable housing certification - the eligible CHP has given each entity that holds an ownership interest in the dwelling certification that the dwelling was used to provide affordable housing
    • NRAS - no entity that has an ownership interest in the dwelling is entitled to receive a National Rental Affordability Scheme (NRAS) incentive for the NRAS year, and
    • MIT membership - if the ownership interest in the dwelling is owned by a Managed Investment Trust (MIT), the tenant does not have an interest in the MIT that passes the non-portfolio test.

    To qualify for the discount, an investor must have provided affordable housing on or after 1 January 2018 for a period, or intermittent periods, totalling not less than 1,095 days. The investor must have invested either directly, or through a trust including where there is a interposed entity between the investor and the trust. The trust that provides the affordable housing and any interposed entities may be a trust, a managed investment trust or partnership, but cannot be a public unit trust or superannuation fund.

    How to calculate the additional CGT discount

    The additional affordable housing CGT discount percentage, which will be 10% or less, is calculated as follows:

    (CGT discount percent ÷ 5) × (Affordable housing days ÷ Total ownership days)

    where:

    • CGT discount percentage is the discount of up to 50% on capital gains.
    • Affordable housing days are the number of days the dwelling was used to provide affordable housing (on or after 1 January 2018) during its ownership period (and shown on the affordable housing certificate), less the number of days when the individual receiving the affordable housing capital gains discount was a foreign or temporary resident.
    • Total ownership days are the number of days the dwelling was held from the time it was acquired until a CGT event occurred to it, excluding any period of foreign or temporary residency after 8 May 2012.
    Affordable housing certificate

    If you invested directly in affordable housing, you should have received an annual affordable housing certificate from your CHP showing the number of days your investment was used to provide affordable housing. If you invested in affordable housing through a trust or managed investment trust, you may need to contact the trustee to get the number of affordable housing days in order to work out your additional affordable housing CGT discount percentage.

    Example 55: Working out the aggregate period and affordable housing discount

    On 1 February 2018, Lisa purchased a dwelling that is residential premises.

    During her ownership assume Lisa uses the dwelling as follows:

    • left it vacant and undertook repairs from when she acquired it on 1 February 2018 (the acquisition date for CGT purposes) until 15 February 2018 (15 days)
    • rented it out through a CHP as affordable housing from 16 February 2018 until 15 August 2020 (912 days)
    • rented it out through a real estate property manager at market rates (that is, not providing affordable housing) from 16 August 2020 until 15 November 2020 (92 days)
    • rented it out through a CHP as affordable housing from 16 November 2020 until 31 May 2021 (197 days), and
    • vacated the property and prepared it for sale on and after 1 June 2021 (23 days).

    On 23 June 2021 (the disposal date for CGT purposes), Lisa signed a contract to sell the dwelling, with settlement occurring on 23 July 2021. Lisa made a capital gain of $100,000.

    Based on the assumptions above, Lisa would have held the dwelling for a total of 1,239 days. She used the dwelling to provide affordable housing for 1,109 of the 1,239 days. As Lisa used the dwelling to provide affordable housing for more than 1,095 days, she would be eligible for the additional affordable housing capital gains discount (assuming the dwelling meets the other requirements).

    Lisa's affordable housing capital gain discount percentage is equal to:

    (capital gain discount percentage ÷ 5) × (Affordable housing days ÷ Total ownership days)

    She works this out as:

    (50% ÷ 5) × (1,109 ÷ 1,239) = 8.95% (this is the discount percent available for the provision of affordable housing)

    The discount percentage is equal to the sum of the capital gain discount percentage and the affordable housing discount capital gain percentage. That is, 58.95% (50% plus 8.95%).

    Lisa reduces her capital gain by the discount percentage. Lisa has capital gain of $100,000. She works out her capital gain after capital gains discount as:

    Capital gain × (1 − discount %)

    $100,000 × (1 − 58.95%) = $41,050

    Lisa includes only $41,050 of the $100,000 capital gain in her assessable income from her sale of this property, as a result of investment in affordable housing and meeting all its conditions.

    Note: Capital gains can also be reduced by capital losses and other concessions or exemptions, however, for the purpose of this example, these have not been factored in.

    End of example

    See also:

      Last modified: 20 Jul 2021QC 64895