When you are selling your property, few people stop to consider the capital gains tax (CGT) implications of the sale. However, this is a mistake. You can’t assume that every dollar of profit is yours to spend. Instead, up to 45% of the profit on sale will have to be paid to the ATO. Here is my guide to minimising tax when your sell your property.
CGT will be payable on your rental property when it is sold. In simple terms, this is calculated based on the difference between sales proceeds and cost base. The latter figure is usually the amount you purchased the property for.
The rate of CGT is your marginal tax rate. In other words, the capital gain is added to your other income and taxed as the top slice, at the applicable tax rate.
Don’t forget to claim the CGT discount
The figure calculated above is reduced by 50% if you have owned the property for more than 12 months (or 1/3rd if the entity selling the property is a super fund). Don’t forget to claim the CGT discount in your tax return. Your tax liability in relation to the property will literally be halved!
If you haven’t owned the property for more than 12 months, you don’t get the discount. Therefore, it makes sense to defer the sale of your property beyond the 12-month mark in order to claim entitlement to the discount.
Timing your capital gain
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. If there is a long gap between signing the contract and settlement, these dates may fall into different tax years. If so, you don’t need to record the gain in your tax return for the year that contracts were entered into until the property settles. This could require going back to amend your tax return for the year that you signed the contract.
Made a loss on your property?
If you make a capital loss (ie base cost exceeds sale proceeds), you can offset it against other capital gains in the same year or – if there aren’t any – carry it forward and deduct it from any capital gains in later years.
Don’t forget to take into account sales and purchase costs
Don’t forget to add to the cost base of the property those incidental costs associated with acquiring, and disposing of it. Examples include legal fees, stamp duty and real estate commissions.
Look at claiming “costs of ownership”
You can sometimes include the following costs in the cost base for CGT:
- council rates
- land tax
- maintenance costs
- interest on money you borrowed to buy or improve the property.
However, they can only be included in the cost base where you were unable to claim a deduction for the costs because you didn’t use the property to produce assessable income. Examples could include using the property as your main residence for a while or perhaps using it as a holiday home.
In addition, you can only claim these costs if the property was 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).
These costs are excluded from the cost base for the purposes of calculating a loss.
Can you claim the main residence exemption?
If you lived in the property as your main residence before renting it out, you will be entitled to the main residence exemption for this period, meaning that the part of the gain relating to your use of the property as your home will be tax free. In addition, the main residence exemption may be extended once you have vacated the property. The exemption can be claimed for the subsequent 6 years where the property has been rented out provided you didn’t buy another property and use it as your main residence.
Adjust for capital works deductions
In working out the cost base of your rental property, you will need to exclude any capital works deductions you’ve claimed. You also need to adjust for any capital works deductions you have omitted to claim but can still claim because the period for amending your tax return has not expired. This is to prevent you getting relief for these amounts twice – once as income tax relief in the year of the claim and again in the cost base in the year of sale.
If you didn’t claim capital works deductions because you didn’t have sufficient information to work out the amount and nature of the construction expenditure, you don’t need to adjust the cost base.
The complexity of calculating Capital Gains Tax
Calculating capital gains can often be very complex. If you’re looking to sell assets and want to understand what the consequences might be, or if you’ve already sold and want to know what your potential tax bill is, speak to one of our experienced tax consultants. Call H&R Block on 13 23 25 or find your nearest office and book an appointment online.
By Mark Chapman, Director of Tax Communications at H&R Block.