An investment property doesn’t only involve annual rental income or loss. You will also have to pay a tax when you sell it, which is called capital gains tax. This is prompted by the selling of your property, and will be calculated at the date of the sale contract. You must declare a capital gain (or loss) in your tax return of the same financial year as the sale occurs.
Capital gain calculation
Capital gain is calculated by subtracting the cost base of your property from the capital proceeds you receive from it. Proceeds include the price the property was sold for, while the cost base will generally include the money you paid for the property and incidental costs, less building depreciation claimed.
An example capital gain calculation:
- If an investor sold their property for the list price of $500,000, their proceeds are $500,000.
- If they bought the property for $150,000, paid $3,000 of legal fees and, $25,000 of stamp duty to buy. Then spent $3,000 of legal fees, $15,000 agents commission to sell and claimed $80,000 of building depreciation, their cost base is $276,000.
- Their gross capital gain is the proceeds less the cost base being $224,000.
- If they owned the property for more than one year the net taxable capital can be halved, so they only declare $112,000 in their tax return.
- This amount is added to their regular income and tax is paid accordingly just like regular taxable income.
Capital loss is calculated in a similar way to capital gains, however a capital loss cannot be used to offset your regular income in the same way a capital gain will add to it. Instead, it is carried forward to offset future capital gains, so unless you have capital gains in the same year, there is no immediate tax benefits for making a capital loss.
Capital gains for trusts & companies
The above guidelines will only apply to individuals with rental properties. If you’re a trust, super fund or company, different CGT discount rules will apply. Your cost base will also change slightly if the property you owned was purchased before 1990’s or was not a residential property.
Speak to an accountant
As with any investment, it is important you speak to a financial advisor for advice specific to your situation before making any investments or decisions regarding your finances.
If you would like information on obtaining finance for an investment property, please do not hesitate to call us on 1300 558 887 or enquire online now.