Capital Gains Tax & Investment Properties - Panicatax
 

A rental property can be a great investment option. Real property offers a consistent return and when combined with negative gearing investors can enjoy tax savings while achieving capital growth in the value of the property. However, eventually the Australian Taxation Office is going to want their cut and that usually happens in the form of Capital Gains Tax when you decide to sell.

 

What is Capital Gains Tax?

Capital Gains Tax (CGT) is a tax charged against the profit you make on the sale of particular types of assets which you purchased after 20 September 1985. While most assets you hold for personal use (your home, car, furniture etc) are exempt under ordinary circumstances most other assets are subject to CGT on disposal.

 

How much Tax do I pay on a Capital Gains?

Capital gains are reported in your income tax return for the year in which they arise. These amounts are treated as another form of assessable income and are taxed at your normal marginal tax rates. There is no special income tax rates applicable to a capital gain.

 

How will Capital Gains Tax effect the sale of my Investment Property?

When you enter into a contract to sell your investment property you will need to calculate the gain or loss you made on the property during the period in which you owned it. Lets take a look at a simple example of a property purchase and disposal and see how the gain or loss is calculated:

Josh and Kathryn purchased an investment property on 1st of July 2009 for $350,000. As part of this purchase they paid $20,000 in stamp duty and $3,000 in legal and accounting fees. This gives the property a ‘Cost Base’ for tax purposes of $373,000.

On 30th June 2013 Josh and Kathryn sold their investment property for $410,000. As part of the disposal they incurred $10,000 in agent commissions and a further $2,000 in legal and accounting expenses.

Josh and Kathryn would calculate their gain or loss as follows:

Sale price 410,000
Less:  
Agent Commissions (10,000)
Legal and Accounting fees (2,000)
Net Sale Proceeds $398,000
Less – Cost Base: ($373,000)
Gain on sale $25,000

Josh and Kathryn have achieved a capital gain on their investment property of $25,000 and they would each need to report a capital gain of $12,500 in their tax returns for the year ended 30 June 2013.

 

Are there any Capital Gains Tax Concessions or Reductions available to help?

The Australian Taxation Office gives individual taxpayers a 50% reduction on any capital gains made providing the asset sold was held for more than twelve months prior to the date of sale. In the above example Josh and Kathryn would both be eligible for this reduction as the property had been held in excess of twelve months prior to sale. The capital gain for each individual would be reduced to $6,250 for tax purposes.

If you initially lived in the property prior to treating it as an investment you may also qualify for the main residence exemption on the sale of the property. We will cover this in a future article.

 

Are there any other factors to consider?

Many investors claim a deduction for special building write-off during the period they own an investment property. This deduction represents a partial write-off of the construction costs incurred when the dwelling was originally constructed on the block. Claiming this deduction will increase the tax savings associated with the property during each financial year the property is held as an investment. However, these deductions reduce the cost base of your asset each year you claim the deduction and will, therefore, increase the capital gain you make on the sale of the property. If we return to Josh and Kathryn’s investment property but in this example they claimed a total of $15,000 of special building write-off deductions during the period they owned the property:

Sale price 410,000
Less:  
Agent Commissions (10,000)
Legal and Accounting fees (2,000)
Net Sale Proceeds $398,000
Less – Cost Base: ($373,000)
Add: Special Building write-off 15,000
Gain on sale $40,000

Josh and Kathryn have now achieved a capital gain on their investment property of $40,000 for tax purposes and they would each need to report a capital gain of $20,000 in their tax returns for the year ended 30 June 2013. As discussed they would each be eligible for the 50% reduction as the property was held for more than twelve months.

 

Working with Panic Atax

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