What is Capital Gain Tax (CGT)?

• Buying and selling an investment property involves not only annual rental income or loss but also the tax you have to pay when you sell it, known as Capital Gains Tax (CGT).
• In the year of sale, you need to declare this capital gain or loss in your tax return.
• Calculating capital gains tax is complicated and varies with your specific circumstances. Seek assistance from a tax professional.

When does CGT apply?

• CGT is applicable when selling a rental property.
• It doesn’t apply if you’re selling your principal place of residence or a property that you’ve resided in for at least 6 months.

How is CGT calculated?

• CGT is calculated as the proceeds you make from selling the property minus the cost base.
• The cost base includes the costs of selling the property and the initial costs of buying the property.

Are there any exemptions to CGT?

• CGT on investment properties: Profits on the sale of investment properties that have earned income may be subject to CGT. If you hold the property for at least 12 months, CGT is typically reduced by 50%.
• CGT on inherited properties: If you inherit a property and want to sell it, waiting can work against you when calculating CGT. If you inherited a home purchased before September 1985 or one that was used as a principal dwelling, you have two years to sell it without paying CGT on the profits.

How do I calculate CGT on rental property?

• If an investor sold their property for $400,000, their proceeds are $400,000.
• If they bought the property for $200,000, and paid $2,000 of legal fees to buy, $20,000 of stamp duty to buy, $2,000 of legal fees to sell, $10,000 agents commission to sell and claimed $50,000 of building depreciation, their cost base is $184,000.
• Their gross capital gain is the proceeds less the cost base being $216,000.
• If they owned the property for more than one year, the net taxable capital can be halved, so they only declare $108,000 in their tax return as capital gains.

What is capital loss?

• A capital loss is calculated similarly to a capital gain.
• While a capital gain is added to your regular income to calculate your tax, a capital loss cannot be used to offset your regular income. It is carried forward to be offset against future capital gains only.

CGT for trusts and companies

• The above rules apply to individuals who own rental properties. Trusts, super funds, or companies have different CGT discount rules.

What’s the best, typical, worst-case scenario with CGT when investors sell their rental property?

• Best case: No capital gains tax if they have lived in it previously as their home and can use some of the 6-year rule.
• Typical case: Investors will pay capital gains tax but at least pay tax only on half of the gain due to owning the property for over 1 year.
• Worst case: An investor buys the property, then sells it within a year and does major renovations to make it a new property as per ATO. They will pay full income tax on the gain and also be subject to GST on the sale price.

Misconceptions around CGT

• Some people think your cost base is indexed with inflation over time so a small gain is not taxable. This is not true.
• Some people think that you can transfer property between family members or to related businesses and pay no CGT. This is not correct.
• Some people think an inherited investment property is always at a market value cost. Sometimes you inherit your relative’s low-cost base and CGT liability as well.

CGT – tips for investors

• Sell with the capital gains discount guaranteed (e.g., hold the property for more than 12 months).
• If you have multiple owners (e.g., husband and wife), the overall tax rate can be lower due to stepped income tax rates.
• Estimate the capital works deduction with a quantity surveyor.
• Be aware that some properties no longer have plant and equipment depreciation, even for newer second-hand apartments.
• Do not mistake a development profit with a capital gain. Property development is fully taxable with no CGT concessions.

Are granny flats exempt from CGT?

• The family home is generally exempt from CGT, but your granny flat may not be.
• If you’re renting the flat out to a third party, it could become partially liable to CGT in the event of a sale.
• Following the 2020 budget announcement, the federal government plans to scrap CGT for granny flats where there is a written formal agreement with relatives who are older or are living with a disability.

Methods of calculating CGT on an investment property

• CGT Discount Method: Allows you to discount your capital gain by 50% if you’ve owned the property for at least 12 months.
• Other Method: Applies for properties held for less than 12 months. It is a straightforward method of subtracting the cost base from the capital proceeds.
• Indexation method: Allows property investors to increase the cost base by indexing to inflation if the property was acquired before 21 September 1999 and held for 12 months or more.

The 12-month ownership rule for CGT

• If you maintain ownership of the property for more than 12 months before selling it, you’re entitled to a 50% discount on the capital gains.

No main residence exemption for expats and foreign residents for tax purposes

• A bill passed on 12 December 2019 removes the main residence exemption for foreign residents for tax purposes, including Australian expats.

The 6-year rule for CGT

• Your main residence continues to be exempt from CGT for up to six years if it used to produce income (e.g., rented out) or indefinitely if it is not used to produce income.
• If you move back into the property, the six-year rule resets, allowing another six years of exemption.

Property selling costs

• Agent Fees
• Marketing Costs
• Conveyancing Fees
• Capital Gains Tax (CGT)
• Presale Repairs and Renovations
• Styling/ Home Staging
• Auctioneer’s Fees
• Lender Fees
• Moving Costs

Property purchasing costs

• Minimum of 5% deposit.
• Stamp duty.
• Property title transfer fee.
• Registration fees.
• Conveyancing fees.
• Inspections including building/strata and pest.
• Home loan setup fees.
• Lenders Mortgage Insurance (LMI).