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  • Capital gains tax on sale of rental properties

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    When you sell or dispose of a rental property you may make a capital gain or loss. This will depend on when you acquired the property.

    If you bought property before 20 September 1985

    You are exempt from capital gains tax (CGT). CGT came into effect from 20 September 1985.

    However, if you made major capital improvements to the property after 19 September 1985, they are treated as a separate CGT asset if the cost base of the improvements are both:

    You can calculate the capital gain or loss by comparing the cost base of the improvements to the proceeds of sale that are reasonably attributable to the improvements.

    If you bought the property on or after 20 September 1985

    You may make a capital gain or capital loss when you dispose of a rental property.

    If the capital proceeds (sale price) are:

    • more than the cost base, the difference is a capital gain
    • less than the cost base, you'll need to calculate the reduced cost base.

    If the reduced cost base is:

    • more than the capital proceeds, the difference is a capital loss
    • less than the capital proceeds, there is neither a capital gain nor a capital loss.

    Working out cost base or reduced cost base

    The cost base is usually the cost of the property when you bought it, plus any costs associated with acquiring, holding and selling it. The cost base is made up of five elements.

    Element 1 Money paid or property given for CGT asset

    This includes the total money paid (or required to be paid) for the rental property and the market value of property given (or required to be given) to acquire the asset. For example: purchase price.

    Element 2 Incidental costs of acquiring, selling or disposing the asset

    For example: stamp duty, legal fees, valuation fees.

    These costs are not included if you:

    • claimed a tax deduction for them in any year, or
    • can claim them because the period for amending the relevant income tax assessment has not expired.
    Element 3 (cost base) Costs of owning the CGT asset

    For example: insurance costs, rates and land taxes.

    (Reduced cost base)

    Balancing adjustment amount.

    These costs are not included if you:

    • claimed a tax deduction for them in any income year, or
    • can claim them because the period for amending the relevant income tax assessment has not expired, or
    • acquired the asset before 21 August 1991.
    Element 4 Capital costs to increase or preserve the value of your asset or to install or move it

    For example: costs for building a new pergola.

    Element 5 Capital costs of preserving or defending your title or rights to your CGT asset

    For example: legal fees to defend your ownership of the rental property.

    These costs are not included if you:

    • acquired the asset after 31 May 1997, and
    • claimed a tax deduction for them in any income year, or
    • can claim them because the period for amending the relevant income tax assessment has not expired.

    Working out your cost base or reduced cost base (continued)

    How to calculate a reduced cost base:

    1. Include all elements of the cost base except the third element which changes to now be the balancing adjustment amount, for example a balancing adjustment relates to the sale of the depreciable assets in the rental property.
    2. Do not apply indexation to any elements of the reduced cost base.

    Capital works deductions

    You need to subtract any capital works deductions if you acquired the rental property after 13 May 1997 and you either:

    • claimed a deduction for them in any income year
    • have not yet claimed a deduction because the period for amending the relevant income tax assessment has not yet expired.

    Depreciating assets

    A depreciating asset is considered a separate asset from the property for the purpose of CGT. When calculating your capital gain or loss, the value of a property's depreciating assets at the time of purchase and at sale are removed from the cost base and capital proceeds.

    Working out your capital gain

    There are three methods for working out your capital gain. If eligible for more than one of the calculation methods, you can choose the method that gives you the best result – that is, the smallest capital gain.

    These are:

    1. Discount method – reduce your capital gain by 50% for resident individuals where asset held for 12 months or more before the CGT event.
    2. Indexation method – increase the cost base by applying an indexation factor based on the consumer price index (CPI). This method is only available for assets purchased before 11.45am (legal time in the Australian Capital Territory) on 21 September 1999 and held for 12 months or more before the relevant CGT event.
    3. The 'other' method – subtract the cost base from the capital proceeds if the asset was owned for less than 12 months. In this case, the indexation and discount methods do not apply.

    Timing of a CGT event

    The timing of a CGT event tells you which income year to report your capital gain or loss and may affect how you calculate your tax liability. The date of the CGT event for your property is the date you enter into the contract for the sale of disposal, not the settlement date. If there is no contract, the CGT event takes place when the change of ownership occurs.

    Inherited property

    If you inherit property, there are special rules for calculating your cost base. See Cost base of inherited assets.

    Apportioning gain or loss

    If you are a co-owner of an investment property, any capital gain or loss will be apportioned in accordance with your share of the ownership interest in the property.

    Main residence

    If your rental property was your main residence

    As a general rule, your main residence is exempt from CGT. A property stops being your main residence once you stop living in it. However, you can choose to continue treating it as your main residence for CGT purposes even though you no longer live in it:

    • for up to six years, if it is used to produce income
    • indefinitely, if it is not used to produce income.

    You can’t treat any other property as your main residence for the same period (except for a limited time if you're moving to a new house – up to six months).

    If your property is your main residence and you use part of it to produce income

    If you use any part of your main residence to produce income, during all or part of the period you owned it (such as renting out a room or running a business), you are not entitled to the full main residence exemption where you:

    • acquired your property on or after 20 September 1985 and used it as your main residence, and
    • would be allowed a deduction for interest (had you incurred it) on money borrowed to acquire the property (interest deductibility test).

    This would not include a home study to undertake work usually done at your place of work.

    Value of home when first used to produce income rule

    To work out your capital gain, you need to know the market value of your property at the time you first used it to produce income if all of the following apply:

    • you acquired the property on or after 20 September 1985
    • you first used the property to produce income after 20 August 1996
    • when a CGT event happens to the property, you would get only a partial exemption, because you used the property to produce assessable income during the period you owned it
    • you would have been entitled to a full exemption if the CGT event happened to the property immediately before you first used it to produce income.

    Use our Capital gains tax property exemption tool to calculate the percentage of your exemption.

    Note: Remember if you have used your property to earn income and are eligible for a CGT exemption or rollover, you need to make the election in your tax return.

    Record keeping

    You must keep records relating to your ownership and all the costs of acquiring, holding and disposing of property such as, contract of purchase and sale, stamp duty and major renovations.

    Records are generally required to be held for at least five years after the sale of the property (or year in which you declare a capital gain). If you make a capital loss, once you've offset the loss against a capital gain, you should keep your records for a further two years.

    For more information with record keeping, refer to Tax-smart tips for your investment property.

    Foreign resident

    There are special CGT rules if you’re a foreign resident for tax purposes. These rules will impact you when you sell residential property in Australia. Refer to Main residence exemption for foreign residents.

    Example: main residence for part of the ownership period

    Vrinda bought a house on 1 July 2005 for $350,000 and moved in immediately. On 1 July 2015, she moved to a new house (which she treated as her main residence) and began to rent out her old house. She had a valuation done at the time for $500,000 for her old house.

    She sold the old house (rental property) for $650,000. Its contract for sale was signed on 1 July 2018. Vrinda is taken to have acquired the old house on 1 July 2015 and uses its market value of $500,000 (value at the time of first use for producing income) as the first element of her cost base.

    Virinda also has incidental costs for $15,000 for acquiring/selling the property. Virinda makes a capital gain of $135,000. Since Vrinda owned her old house for at least 12 months, she chooses to use the discount method to calculate her net capital gain of $67,500.

    End of example

     

    Example: renting out part of a home

    Thomas purchased a house 1 July 1999 and sold it on 30 June 2020. The house was his main residence for the entire time.

    Throughout the period Thomas owned the home, a tenant rented one bedroom, which represented 20% of the home. Both Thomas and the tenant used the living room, bathroom, laundry and kitchen, which represented 30% of the home. Thomas used the rest of the home. Therefore, Thomas would be entitled to a 35% (20% + half of 30%) deduction for interest if he had incurred it on money borrowed to acquire his home.

    Thomas made a capital gain of $120,000 when he sold the home. Of this total gain, the following proportion is not exempt:

    Capital gain x percentage of floor area = taxable portion

    $120,000 × 35 % = $42,000

    Thomas can use either the indexation or the discount method to calculate his capital gain.

    End of example

     

    Example: sale of a rental property

    Brett purchased a residential rental property on 1 July 1998, for $350,000 of which $12,000 was attributable to depreciating assets. He also paid $20,000 for pest and building inspections, stamp duty and solicitor's fees.

    For 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 renovations, the property would be valued at around $600,000. The renovations were completed on 1 October 2019 at a cost of $30,000.

    On 1 February 2020, he sold the property for $600,000 (of which $4,000 was attributable to depreciating assets).

    Brett could claim a capital works deduction of, $254 ($30,000 × 2.5% × 124 ÷ 366) for the renovations.

    Brett works out his cost base as follows in the table:

    Purchase price of property (less depreciating asset $12,000)

    $338,000

    plus

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

    $20,000

    Capital expenditure (renovations) $30,000 less capital works deduction $254

    $29,746

    Real estate agent's fess and solicitor's fees on sale of the property

    $12,000

    Cost base unindexed

    $400,246

    Brett deducts his cost base from his capital proceeds (sale price) as below in the table:

    Proceeds from selling the house (less depreciating assets $4,000)

    $596,000

    less

    Cost base unindexed

    $400,246

    Capital gain

    $195,754

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

    $195,754 × 50% = $97,877

    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

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      Last modified: 29 Sep 2021QC 59553