The Ins and Outs of Capital Gains Tax for Residential Properties
Each time you sell an investment property, you must pay Capital Gains Tax (CGT) on the transaction. The CGT applies on the same date as you sign the contract of sale for a property. Investors must declare the profit or loss from the sale on their tax returns in the same year as the sale took place.
Calculating the CGT
The CGT takes several factors into account. Besides the capital proceeds, which is the money gained through the sale, the CGT allows for a cost base.
The cost base includes a number of outgoings. These include the original cost of the property and extra costs. Investors may also add the cost of building depreciation to the figure.
The CGT is then calculated by taking the cost base figure away from the capital proceeds figure. This creates a gross capital gain figure added to taxable income.
The rules change if the investor has owned the property for over one year. In this case, the investor need only declare half the gross capital gain figure. Thus, the investor receives the other half without paying CGT. This means the length of time you own the property affects how much you can save in CGT.
A Calculation Example
It sounds more complex than it is. Consider this example:
An investor sells a home for $500,000, creating a capital proceeds figure of $500,000.
The investor originally paid $250,000 for the property. Furthermore, they incurred several fees, including $25,000 in stamp duty and $30,000 in extra costs. Finally, the investor claimed $50,000 in building depreciation and capital improvement costs. This creates a total cost base of $355,000.
Subtract $355,000 from $500,000 and you calculate how much gross capital gain results from the sale. In this case, it’s $145,000. The investor adds this figure to his or her annual income on the tax return for the year of sale. This income is subject to tax in the same way as the investor’s other income. Thus, this creates the CGT.
Of course, if the investor owned the property for over a year he or she only needs to add $75,500 to the income declared on the tax return.
When Does A Capital Loss Happen?
A capital loss occurs when the cost base figure is larger than the capital proceeds figure. Investors may use a capital loss to offset income for the year.
Unfortunately, a capital loss can only offset capital gains. You gain no benefit from a capital loss unless you also have capital gains.
Let’s take our $145,000 example from above. If the same investor sold another property for a capital loss of $20,000, they could subtract this from the $145,000. This would create $125,000 of taxable income.
However, the investor can’t use that $20,000 to offset any other form of income.
Trusts and Companies
The rules detailed above apply to individual investors. The CGT is different for companies and trusts.
Investors who purchased their properties before 1990 face a different situation. They must use a different calculation for the cost base. The same applies for non-residential properties.
The Final Word
The information above is general in nature. Talk to an expert accountant for specific advice related to your own situation. They can help with financial planning and tax.