How capital gains or losses apply
When you sell or dispose of a rental property you may make a capital gain or loss.
A capital gain or loss is the difference between what it cost you to obtain and improve the property (the cost base) and the amount you receive when you dispose of it.
If you make a:
- net capital gain in an income year, you’ll generally be liable for capital gains tax (CGT)
- net capital loss, you can carry it forward and deduct it from your capital gains in later years.
Use this calculator or steps to calculate your CGT.
You may be entitled to a part of full main residence exemption if you lived in the property before renting it out (see Treating your former home as main residence).
You will be entitled to a part main residence exemption if you rented out part of your home.
For a summary fact sheet with common scenarios about CGT and eligibility for the main residence exemption that you can download as a PDF, see Capital gains tax and the main residence exemption.
If you are a co-owner of the property, you’ll make a capital gain or loss in accordance with your ownership interest in the property.
The application of a capital gain or loss depends on when you acquired the property:
- If you acquired the property before 20 September 1985 then it will only apply to certain capital improvements made after that date.
- If you acquired the property after 20 September 1985, then it will apply to the entire property.
For a summary fact sheet with common scenarios about the CGT on sale of property that you can download as a PDF, see Capital gains tax on the sale of property.
Working out your costs
The cost base and reduced cost base of a property include the amount you paid for it together with some incidental costs associated with acquiring, holding and disposing of it (such as legal fees, stamp duty and real estate agent’s commissions).
It does not include amounts that you have claimed or could claim as a tax deduction.
When you sell your rental property, the time of the event (the time at which you make a capital gain or loss) is when you enter into the contract, not when you settle.
Example: capital gains on the sale of a co-owned rental property
Karl and Louisa bought a residential rental property in November 2016 for a purchase price of $750,000.
They incur costs of purchase, including stamp duty and legal fees, of $30,000.
After purchase they improved the property by constructing a fence for $6,000.
Over the 7 years of ownership of the property, they claimed $5,000 in decline in value deductions and $35,000 in capital works deductions. (If they had purchased the property after 9 May 2017 then there would be no deductions for the decline in value of any second-hand depreciating assets.)
In June 2023, they entered into a contract to sell the property, and in November 2023 it was sold for $900,000. Their costs of sale, including legal fees, were $10,000.
A + B + C + D − E – F = Cost base
Where:
- A is the purchase price
- B is the costs of the purchase
- C is the cost of property improvements
- D is the costs of sale
- E is the capital works deductions
- F is the total amount of decline in value deductions claimed over the period of ownership of the rental property
$750,000 + $30,000 + $6,000 + $10,000 − $35,000 − $5,000 = $756,000
The capital gains outcomes are:
Proceeds = $900,000
Proceeds − Cost base = Capital gain outcome
$900,000 − $756,000 = $144,000
As the property has been owned for more than a year, the discount capital gain rules reduce the capital gain to $72,000.
Karl and Louisa owned the property jointly. This means that they each have a capital gain of $36,000 which they will need to put in their tax return for the year in which the contract to sell the property was made, being the 2023–24 year.
End of example
Capital expenses
Expenses you incur when purchasing, acquiring, selling, or disposing of your rental property are capital expenses. You may be able to include capital expenses when calculating the ‘cost base’ of your property. This can help you reduce the amount of CGT you pay when you sell your property.
Capital expenses include:
- conveyancing costs paid to a conveyancer or solicitor
- title search fees
- valuation fees (when it is a private valuation conducted by your solicitor)
- stamp duty on the transfer of the property.
Example: capital expenses
Stephen recently purchased a rental property that needed repairs before the tenants moved in. He paid tradespeople to:
- repaint dirty walls
- replace broken hardwired light fittings
- repair doors on 2 bedrooms.
The house was also treated for damage by white ants.
Because Stephen incurred these expenses to make the property suitable for rent (not while he was using the property to generate rental income), these expenses are capital expenses and are added to the cost base of the property.
End of example
GST on rental properties
Generally, the sale of existing residential premises is input taxed. This means:
- you cannot claim GST credits on any costs associated with buying or selling
- GST does not apply to the rental payments you receive.
However, if you build new residential premises for sale, you may:
- be liable for GST on the sale (at settlement)
- need to register for GST depending on your turnover.
If you do need to register for GST, you may also be entitled to GST credits on construction and sale costs, even if the premises have been rented for a period before being sold.
For more information, see GST and residential property.
Foreign resident capital gains withholding
Foreign resident capital gains withholding (FRCGW) applies when selling your rental property where the contract price is $750,000 or more.
The FRCGW tax rate is 12.5%.
A clearance certificate application form should be completed and lodged by Australian resident sellers who don’t wish to have amounts withheld by purchasers.
For more information on FRCGW, see Capital gains withholding: Impacts on foreign and Australian residents.
Source: ato.gov.au June 2024
Reproduced with the permission of the Australian Tax Office. This article was originally published on https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/property-and-capital-gains-tax/cgt-when-selling-your-rental-property
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