A ‘capital gain’ occurs when you sell an investment for more than it cost you. The tax associated with this gain is often confusing. However, once explained you’ll be able to distinguish if you’re eligible for an exemption or can reduce the capital gains tax payable. Let’s look at capital gains tax in greater detail so you can work out your property selling strategy.
How to Calculate Capital Gains Tax
The cost of capital gains applies to an asset such as investment property or shares purchased on or after September 20, 1985. This tax has no fixed rate. Instead, it is purchase and sales price based, less any costs. Therefore, to calculate this tax, subtract the buying price of your property from the expected sale figure, less any ownership costs. The final figure is the gain that you’ve made. Let’s look at an example.
You buy a 3-bedroom investment property in October 1999 for $194,000. In 2018, you sell this property for $770,000. Your purchasing costs in 1999 were $2,500. Over the years of ownership, costs were $168,820, and the sale costs $30,500. Therefore, the difference between the purchase and sale price, less costs is $374,180.
|Total Ownership Costs||$201,820|
|Capital Gain (Net Gain – Ownership Costs)||$374,180|
So, under new capital gains tax laws, for property purchased after September 21, 1999, the tax payable is the marginal tax rate x half the capital gain. Of course, this tax only applies to property owned for more than 12-months. Thus, as per our earlier example, the capital gains payable on the property sold for $770,000 is $89,389.
In comparison, if this property’s purchasing date was October 1990, before legislation changes, then under the old capital gains regime of marginal tax rate x indexation factor x capital gain, this property would have incurred a tax of $150,653.
Let’s look at the three applicable ways to calculate capital gains tax, based on legislative changes.
|Less than 12-months|
|Property ownership is less than 12-months from the date of purchase.||The most basic method of Capital Gains Tax (CGT)||Sale price less cost.|
|Property ownership is greater than 12-months from the date of property purchase ownership costs.||A 50% discount applies to property purchased after September 21, 1999, for individuals and 33.3% for super funds.||The purchase price + sales price = net gain – any ownership costs.|
|Property ownership began after September 20, 1985, but before 11.45am (ACT time) September 21, 1999.||The cost base increases by applying an indexation factor based on Consumer Price Index (CPI).||marginal tax rate x indexation factor x capital gain.|
What Are Ownership Costs?
So, now you understand how to calculate capital gains tax, let’s look at what ownership costs you can deduct to reduce capital gains paid.
Ownership costs include any payment made for the property over the term of possession. Consequently, this includes:
- Stamp duty.
- Legal fees – conveyancing, title searches and other expenses.
- Property management and agent selling fees.
- Advertising and marketing expenses.
- Council rates*.
- Land tax*.
- Emergency services levy*.
- Garden and property maintenance.
- Loan interest paid*.
- Property insurance*.
- Improvements – new kitchens, bathrooms, faade, or any other changes made to the property.
- Depreciation of fixtures and fittings*.
*Please note – rates, land tax, insurance and interest on borrowed monies apply to ownership costs for property purchased after August 20, 1991, if the property didn’t produce assessable income. Depreciable items are deductible on property purchased after 1997.
Over the lifetime of ownership, costs add up. Keeping your receipts for improvements made while you’ve owned the property can reduce your capital gains tax. For example, let’s say renovating the kitchen in a property cost you $14,000, and a bathroom $6,000. Together these add up to $20,000 in capital gains deductions.
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Are There Any Exceptions to Capital Gains Tax?
In some instances, you can be exempt from Capital Gains Tax (CGT) or have the tax reduced. These exemptions are as follows:
Time of purchase
If you have purchased your property before September 20, 1985, then you will be exempt from CGT.
Place of residence
One main exemption to capital gains tax is a place of residence. Hence, if you live in a property and have services connected in your name, then it’s considered a family home. These types of property are then capital gains exempt. As a guide, a main residence is where:
- You and your family live.
- You have personal items stored.
- You have listed, the property’s address, when registering to vote.
- You have connected the phone, gas, and electricity in your name.
However, not all homes on land over two hectares are entirely capital gains exempt. Some of the property will attract capital gains if it’s generating an income as a primary producer.
Furthermore, gifting the property to a family member doesn’t make the property capital gains tax exempt either. The sale price of a gifted property is the market value of the property at the time of title transfer. Even though, a property left to someone in a will or dissolution of marriage is capital gains exempt. You can find out more about capital gains tax exemptions via the ATO website, who offer a tool to work out what percentage of your capital gain is exempt from capital gains tax (CGT).
Overall, the best way to accurately calculate your capital gains tax and to reduce this tax is to discuss your options with your accountant before you sell. Timing is everything, and you can potentially save more if you maximise your deductions within a specific financial year.