Capital gains tax is an area of taxation that often confuses property investors. The legislation can appear complex, however it’s important for all investors to have a good understanding of it before selling an asset.
Capital gains tax is the fee you pay on any profit made from the sale of an investment property. This profit is referred to as a capital gain and is the difference between what you paid for the property (your cost base) and what you sold it for. It’s included in your assessable income and taxed at your marginal rate.
In this article, we will cover:
- When do you pay capital gains tax on investment property?
- How to calculate capital gains tax
- Capital gains tax methods
- Capital gains tax exemptions
- Depreciation and capital gains tax
When do you pay capital gains tax on investment property?
A capital gains tax (CGT) event occurs when an asset is sold. The timing of this is important as it determines the income year the tax will be applied. For property investors, a CGT event is triggered when you enter into a contract of sale and therefore stop being the owner of the property. The CGT is then applied in the same financial year you sold your property.
It’s important to keep thorough records of this process so you can correctly calculate the amount of capital gain or capital loss you make. Property investors are required to keep these records for five years after the CGT event occurs.
This is particularly important when you make a capital loss, as the amount can be carried forward as part of unapplied net capital losses. A capital loss does not reduce a taxpayer’s assessable income. Instead, taxpayers are able to offset the loss against a capital gain in the current or future financial years.
How to calculate capital gains tax
A basic formula for calculating CGT is:
Selling price – transaction costs – original purchase price + associated transaction costs = capital gain (or loss)
If you have bought and sold an investment property within 12 months, your net capital gain will be added to your taxable income for that year. However, if you have owned an investment property for more than 12 months, there are two methods to calculate your net capital gain – discount and indexation. Depending on eligibility, you can choose whichever method reduces your capital gain the most.
Capital gains tax discount method
Property investor who have owned an investment property for more than 12 months are entitled to specific concessions when calculating CGT. If you’re an Australian resident and have held the property for more than one year, you’re eligible for a 50 per cent discount on your net capital gain. This reduces your assessable income and therefore the amount of tax you will pay.
Capital gains tax Indexation method
If you are an Australian resident who purchased an investment property before 21st September 1999, you are eligible to use the indexation method. The indexation method accounts for inflation and therefore calculates your net capital gain based on what your property would be worth in today’s property market. The calculation divides the consumer price index (CPI) at the time you sold your property by the CPI at the time you bought the property. As a result, your initial purchase price is likely to be increased, and your capital gain reduced.
Capital gains tax exemptions
There are certain circumstances in which CGT can be exempt. CGT exemptions include 50 per cent discount, principal place of residence, six year rule and six month rule.
50 per cent rule: As previously mentioned, property investor who have owned an investment property for more than 12 months are entitled to a 50 per cent discount on CGT.
Primary place of residence: This refers to when a person resides, occupies and lives in a property as their home. If a property is considered an owner’s primary place of residence, they are entitled to a full CGT exemption.
Six year rule: If a property owner moves out of a primary place of residence and rents it out, they can claim an exemption from CGT for a period of up to six years. If a property owner moves back into the property and afterwards moves out again then a new six year period commences from the time they last moved out.
Six month rule: There are exemptions from CGT if a property owner considers more than one property to be a primary place of residence within a six month period. The property owner must meet one of the below conditions:
- The old property was the owner’s primary residence for a period of at least three months in the twelve months before they sold it
- An owner did not use the property to provide assessable income in any part of the twelve months prior to selling
Depreciation and capital gains tax
Capital gain is your profit minus your cost base. Depreciation impacts your cost base and therefore affects CGT. Depreciation deductions can be claimed under two categories – plant and equipment deductions and capital works depreciation. Both can affect your cost base in different ways.
To find out more, read Does Depreciation Affect Capital Gains Tax?
Hi,
BMT Team.
I’m Australian citizen I purchased 2 investment properties in 2013 & 2015 both have been rented out as investments from purchase up to now & both receive depreciation schedules through you guys, I am currently living in a rented property & want to know if I move into 1 of my properties as PPOR can I claim full exemption on CGT if I then sell that property at a later date ( say 12 to 18 months later ) or am I only able to claim 50% discount on CGT as Australian resident.
Hi Barry,
Thanks for your comment.
As the property was an investment from purchase you cannot claim a full exemption. However, once the property is declared your primary place of residence (PPOR) it will be eligible for a capital gains tax (CGT) partial exemption. This will be calculated depending on how long the property has been owned, how long it has been used to produce an income and how long it’s been your PPOR.
Because you have owned the property for longer than twelve months it will also be eligible for a 50 per cent discount on CGT.
We recommend discussing this scenario with your accountant before making decisions.
Thanks
The BMT Team.
I bought my house and lived in it since 2011, and in 2017, and within two years, I built a unit in the back of my old house and divided the land into two units. After completion, I moved to live in the back unit and rented the house or front unit until now. Can I get like exempt from Capitol ganes to if I sell the front house?
Hi Ali,
Thanks for your comment.
Because the property has been used to produce an income there will be capital gains tax (CGT).
We recommend consulting an accountant as we are only qualified to provide advice on CGT as directly related to tax depreciation.
Thanks
The BMT Team
Hi,
I purchased a house and land package as an investment property and have rented the house from 10 days after the handover date. I have asked many different people in the property industry and the ATO (twice) on when the 12 months for the CGT discount starts. Not one person has given me the same answer.
Is it from when you sign the land contract?
Is it from the handover date with the builder?
Is it from when the first tenant moved in?
My next question is what date does the ATO use to mark the sale date?
Is it when you have a contract signed with the potential new owner or is it the settlement date?
I am certain I am not the first person to have an investment property this way, so I am wondering why it is not clear on the ATO website or from people in the industry in many different jobs what the actual rule is to this very common situation?
Hello Jamie,
Thanks for your comment.
As we are only qualified to provide advice on capital gains tax (CGT) as directly related to depreciation we recommend you consult an accountant or financial advisor.
Thanks,
The BMT Team
My husband and I bought an investment property in 1989 and we are wanting to sell now. I would like to know if we are exempt from Capitol ganes, if we had the house since then
Could you help us understand what’s the law about CGT please
Thank you
Hi Nevenka,
Thanks for your comment.
CGT was introduced in 1985, this means it will be applied to your investment as it was purchased in 1989.
The amount of CGT will depend on your individual circumstances. Since you have owned the property for more than 12 months you should be eligible for the 50 per cent discount. However, we recommend getting in touch with your accountant to discuss.
Thanks,
The BMT Team.
My parents want to sell me their investment property which I live in (they never have) for around $500,000. They have owned the house for more than twenty years. Bought it very cheap at a government auction. It’s worth somewhere around $850,000 to $900,000 . If they do sell it to me, what tax implications will there be? Will the capital gains tax be 15% of market value? Or fifteen percent of sale price? Stamp duty?
Hi Tim,
Thanks for your comment.
We recommend getting in touch with your accountant to discuss the CGT implications of the property. They are experts in this area and will be able to provide the appropriate advice.
In terms of stamp duty, if this is the first property you have purchased you may be eligible for your state or territory’s stamp duty concession available to first home buyers.
Thanks,
The BMT Team
Property purchased in 1991 and rented out until 2005. Divorce and in property settlement I got this property. Had to spend 180000 to make it lovable and have lived here since. Want to sell. Do I need to pay cgt?
Hi,
Thanks for your comment.
You may be eligible for a full or partial CGT exemption if the property is classed as your main residence when it is sold.
We recommend getting in touch with your accountant as they will be able to provide further advice based on your individual scenario.
Thanks,
The BMT Team