This section explains your CGT obligations for real estate. Real estate includes vacant blocks of land, business premises, rental properties, holiday houses and hobby farms. The CGT exemption for a main residence is also explained in this section.
Apart from the main residence rules, capital gains and capital losses on real estate are worked out under the rules set out earlier in this guide.
Land is a CGT asset. In some cases, improvements made to land are treated as separate CGT assets, see Separate assets. A depreciating asset that is found in a building (for example, carpet or a hot-water system) is also taken to be a separate CGT asset from the building. When a CGT event happens to your property, you must work out a capital gain or capital loss for each CGT asset it comprises (or balancing adjustment in the case of depreciating assets sold with the property).
The most common CGT event that happens to real estate is its sale or disposal, CGT event A1. The time of the event is:
- when you enter into the contract for the disposal
- if there is no contract, when the change of ownership occurs
- if the asset is compulsorily acquired by an entity, the earliest of when
- you received compensation from the entity
- the entity became the asset’s owner
- the entity entered it under a power of compulsory acquisition
- the entity took possession under that power.
If land is disposed of under a contract, it is taken to have been disposed of when the contract is entered into, not the settlement date. The fact that a contract is subject to a condition, such as finance approval, will generally not affect this date.
You are not required to include any capital gain or capital loss on your tax return for the relevant income year until settlement occurs. When settlement occurs, you must include any capital gain or capital loss on your tax return for the income year in which the contract was made. If an assessment has already been made for that income year, you may need to have that assessment amended. Where an assessment is amended to include a net capital gain and a liability for shortfall interest charge (SIC) arises, remission of that interest charge will be considered on a case-by-case basis. Generally, it would be expected that the SIC would be remitted in full where requests for amendment are lodged within a reasonable time after the date of settlement, which, in most cases, is considered to be one month. If you consider that the SIC should be remitted, you should provide reasons why when you request the amendment to your assessment. For more information about SIC see Shortfall interest charge.
Rules to keep in mind
There are a few rules to keep in mind when you calculate your capital gain or capital loss from real estate, in particular rules relating to:
- the costs of owning the real estate
- cost base adjustments for capital works deductions.
Costs of owning
You do not include rates, insurance, land tax, maintenance and interest on money you borrowed to buy the property or finance improvements to it in the reduced cost base. You only include them in the cost base if you:
- acquired the property under a contract entered into after 20 August 1991 (or if you didn’t acquire it under a contract, you became the owner after that date), and
- could not claim a deduction for the costs because you did not use the property to produce assessable income, for example, it was vacant land, your main residence, or a holiday home during the period.
In working out a capital gain for property that you used to produce assessable income (such as a rental property or business premises), you may need to exclude from the cost base and reduced cost base capital works deductions you have claimed in any income year (or omitted to claim, but can still claim, because the period for amending the relevant income tax assessment has not expired).
For information on when property (for example, a building, structure or other capital improvement to land) is treated for CGT purposes as a CGT asset separate from the land, see:
- Does capital gains tax apply to you,
- Major capital improvements to a dwelling acquired before 20 September 1985.
You must exclude from the cost base of a CGT asset (including a building, structure or other capital improvement to land that is treated as a separate asset for CGT purposes) the amount of capital works deductions you claimed (or omitted to but can still claim because the period for amending the relevant income tax assessment has not expired) for the asset if you acquired the asset:
- after 7.30pm (by legal time in the ACT) on 13 May 1997, or
- before that time and the expenditure that gave rise to the capital works deductions was incurred after 30 June 1999.
However, if you omitted to claim capital works deductions because you did not have sufficient information to determine the amount and nature of the construction expenditure, there is no need to exclude the amount of such deductions from the cost base of the CGT asset.
Reduced cost base
You exclude the amount of the capital works deductions you claimed (or omitted to claim but can still claim because the period for amending the relevant income tax assessment has not expired) from the reduced cost base. However if you omitted to claim capital works deductions because you did not have sufficient information to determine the amount and nature of the construction expenditure, there is no need to exclude the amount of such deductions from the reduced cost base of the CGT asset.
Zoran acquired a rental property on 1 July 1997 for $200,000. Before disposing of the property on 30 June 2017, he had claimed $10,000 in capital works deductions.
At the time of disposal, the cost base of the property was $210,250. Zoran must reduce the cost base of the property by $10,000 to $200,250.End of example
There is generally no rollover or exemption for a capital gain you make when you sell an asset and put the proceeds into a superannuation fund, or use the proceeds to purchase an identical or similar asset, or you transfer an asset into a superannuation fund. For example, if you sell a rental property and put the proceeds into a superannuation fund, or use the proceeds to purchase another rental property, a rollover is not available.
A rollover may be available in special circumstances, in particular for destruction or compulsory acquisition of property or marriage or relationship breakdown. However, an asset or the capital proceeds from the sale of an asset may be transferred into a superannuation fund in order to satisfy certain conditions under the small business retirement exemption. For more information about the CGT concessions for small business, see Small business CGT concessions.
Keep appropriate records, see Records relating to real estate.