CAPITAL GAINS TAX. What you need to know before you buy an investment property. Do I need to pay cap


Capital Gains Tax can be a large and unexpected expense when you sell an investment property, especially if you have bought and sold well and made a profit.

Wanting to buy a rental property but not sure on all the taxes involved after you start earning from it? Firstly lets define what capital gain tax is.

What is capital gains tax?

Capital gains tax, is a tax that is applied on the profits you make when you sell off an asset.

* CGT only applies to assets that were purchased on or after 20 September 1985.

When you're selling a home, any profit you make above the cost of acquiring and maintaining the home is considered a capital gain.

Here is the quick process of calculating Capital Gains Tax.

Once your have worked out the capital gain or loss then you need to consider the following variables:

  • Has the property been rented out since you bought it (not your main place of residence) and work out the percentage of time.

  • Have you had your property for more than 12 months? If so you may be eligible for receive a 50% discount.

What is included in my cost base?

The cost base is the total sum of the original purchase price, plus any incidentals, ownership and title costs minus any government grants and depreciable items.

Note* Depreciable building items were not included in the cost base calculations prior to 1997.

  • Incidental costs - stamp duty, legal fees, agent fees and advertising and marketing fees.

  • Ownership costs - rates, land tax, maintenance and interest on your home loan. Note that you can only add rates, land tax, insurance and interest on borrowed money to your cost base if you acquired the property after 20 August 1991, or didn't use the property to produce an assessable income e.g vacant land or main residences.

  • Improvement costs - replacing kitchens, bathrooms or any other improvements you've made on the property

How will I know if I am fully exempt from CGT?
Depending on your circumstances, you may be eligible for a full exemption.
1. Time of purchase

Property is exempt from capital gains tax if purchased before 20 September 1985.

2. Main place of residence

You can avoid paying CGT if you sell a dwelling that's considered your main place of residence. You can only ever have one main residence at any given time unless you're selling your old main residence and buying another.

You are entitled to an overlap period of six months as long as the new property will be your main residence , you lived in the old property for at least three continuous months in the 12 months before you sold it and it wasn't used to produce rent in this same 12 month period.

What constitutes as a main residence?

  • You and your family live in the dwelling.

  • Your mail is delivered there.

  • You have your personal belongings there.

  • You're registered to vote at the property's address.

  • You have connected a phone, gas and electricity to the property.

  • While avoiding CGT liability altogether may not be possible if you haven't lived in the property before you rented it out, you can still apply for partial exemptions in some circumstances.

Making an investment property your main residence

You changed your mind and now you want to move into the home you purchased as an investment. You will be partially exempt from CGT.

CGT owed will be worked out by comparing the days you lived in the property to the number of days you rented out the property.

If you have lived in your home the whole time you have owned it, haven't rented it out either nd the land is smaller than two hectares, you'll get a full exemption on CGT when you sell.

For example : If you are a builder: You sell your home, moving into it within 6 months of the purchase, renovate it and then sell the renovated property. All the profits made from the renovation are totally exempt from CGT.

Temporary absence ( 6 yr rule )

If you have to move out of your home that you own and choose to rent it out, you may be exempt from some CGT liability under the 'Temporary Absence Rule'.

Under the law, the property is still treated as your principal residence for a period of up to six years. If you sell the property within this time from you will be exempt from paying CGT if you profit from the sale.

If you're moving to a new home you own and rent out your old place, you will need to elect one of the two dwellings to be your principle place of residence and capital gains tax will be applied to the sale of your non-primary property.

So now that we have established all the details regarding CGT. What you need to consider when deciding to invest.

If you have already invested in a rental property with the intention to rent it out, first thing you need to do is to keep all your records. Then work out all the expenses that you can claim as deductions, and declare all profits made from rentals in your tax return.

Capital Gains tax will only be paid when selling the property with a few exceptions such as when you rent out the home that you have been living in.

If you have any other property that won't be let out or available for rent, such as a holiday home, a farm, or another asset you choose not to rent then these will apply:
1. The property is also subjected to Capital Gains Tax in the same way as a rental property.
2. Income tax deductions cannot be claimed for the costs of owning this property because it does not generate income from rent.
Exception: You are allowed to include the costs of ownership in the property’s cost base such as interest on loans, council rates and strata, which reduces the capital gains tax liability when you will sell it.
3. If the property is bought as a partnership with someone then you will need to divide the income and expenses with each partner.

4. If there is no loan and you are making a net profit from renting out your property then you can pay as you go (PAYG) towards your expenses tax liability.

5. If your name is on the title Deed, then you will need to declare the income you earn from the property and claim related expenses.

6. The date in which the property is purchased is the date used for Capital Gains purposes. Not the settlement date!

7. There are other ways of obtaining a property apart from buying.

  • Inheritance

  • Prize or gift

  • Transferred due to divorce.

Above is a summary, if you want to know everything about Capital Gains Tax please call us on 02 9411 5070 or email us at Buildersbooks and we can help you answer all your questions!

Disclaimer

This information is not to be relied upon without speaking to your accountant, tax agent or financial adviser depending on the advice.

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