If you are planning to sell an investment property, knowing how to calculate CGT on property can help you understand what a sale might mean for your overall finances. Capital gains tax applies to the profit made on many property sales, and the rules around it are more nuanced than they first appear.
This guide explains what capital gains tax is, when it applies to property, and the general steps involved in working out a capital gain. It is general information only, so it is worth speaking with a tax professional about your own situation.
What Is Capital Gains Tax?
Capital gains tax, often shortened to CGT, applies to the profit you make when you sell an asset for more than it cost you. For property, this usually means the difference between what you paid and what you sold it for, adjusted for certain costs.
CGT is not a separate tax in its own right. Instead, any capital gain is added to your other income and taxed as part of your annual return. The Australian Taxation Office’s guidance on capital gains tax and property sets out the detailed rules that apply.
When Does CGT Apply to Property?
Whether CGT applies to a property sale often depends on how the property has been used.
Your Main Residence
Most homeowners are familiar with the main residence exemption, which generally means CGT does not apply when you sell the home you have lived in as your primary residence. There are conditions attached to this exemption, particularly if part of the property has been used to earn income.
Investment Properties
Properties that have been rented out, used for business, or held purely as an investment are generally subject to CGT when sold. This includes properties that were once your main residence but were later used as a rental.
Vacant land, holiday homes, and properties held in a trust or company structure can also trigger CGT, though the rules differ depending on the ownership arrangement. Market coverage on how investment property sales are trending across Australia can give useful context when weighing up a sale.
How Is CGT on Property Calculated?
At a general level, working out a capital gain on property follows a similar process each time.
- Work out your cost base, which includes what you originally paid plus certain associated costs
- Work out your capital proceeds, which is generally what you received from the sale
- Subtract the cost base from the capital proceeds to find your capital gain or loss
- Apply any exemptions or discounts you may be entitled to
- Add the remaining taxable gain to your other income for the financial year
Each of these steps can involve its own set of rules, which is why many property owners work through this process with a registered tax agent.
The CGT Discount for Individuals
Individuals and some trusts who hold a property for longer than twelve months before selling may be entitled to a discount on their capital gain. In broad terms, this means only part of the gain is included in your taxable income, rather than the full amount.
This discount does not apply to properties held for less than twelve months, and different rules apply to companies. General background on how this works is available through moneysmart.gov.au’s overview of capital gains tax.
What Costs Can Be Included in Your Cost Base?
Your cost base is not limited to the original purchase amount. A range of associated costs can generally be added, which can reduce the size of your taxable gain.
These commonly include stamp duty, legal and conveyancing fees, agent commission on both purchase and sale, and the cost of certain capital improvements made to the property. Reporting from realestate.com.au often touches on how these costs factor into an owner’s overall return when selling.
Keeping thorough records of these costs throughout your ownership makes it much easier to calculate an accurate cost base when the time comes to sell.
Other Things to Consider
A capital loss can occur if a property sells for less than its cost base. Capital losses can generally be used to offset capital gains, either in the same financial year or carried forward to future years.
Ownership structure, timing of the sale, and any periods the property was used differently, such as being rented out for part of the time, can all affect the final calculation. Independent guidance on your obligations as a seller is available through consumer.gov.au, alongside advice from a qualified tax professional.
Because property CGT calculations can be complex, most owners benefit from having a tax agent or accountant review their specific circumstances before lodging a return.
Conclusion
Understanding how to calculate CGT on property gives you a clearer picture of what a sale might mean at tax time, even though the exact figures depend on your personal circumstances. From the main residence exemption to the discount available for longer term ownership, there are several factors that can influence your final result.
If you are considering selling an investment property, it is worth speaking with a registered tax agent about your specific situation and a conveyancer about the sale process itself. You can also explore seen.com.au to connect with property professionals across Australia and read more articles on buying, selling, and investing in property.
FAQs
1. Do I have to pay CGT when I sell my home?
If the property has been your main residence for the entire time you owned it, you are generally exempt from CGT. Different rules can apply if part of the home was used to earn income or if you lived elsewhere for part of the ownership period.
2. What is included in the cost base for CGT purposes?
The cost base generally includes the purchase price plus associated costs such as stamp duty, legal fees, agent commission, and eligible capital improvements. Keeping records of these costs throughout ownership makes the calculation easier later on.
3. Does the CGT discount apply to all property owners?
The discount is generally available to individuals and some trusts who have held the property for more than twelve months. It does not apply to properties held for a shorter period, and different rules apply to companies.
4. Can I offset a capital loss against other gains?
Yes, a capital loss can generally be used to reduce a capital gain in the same financial year, or carried forward to offset gains in future years. A tax professional can advise on how this applies to your circumstances.
5. Should I get professional advice before selling an investment property?
Given how many factors can affect a CGT calculation, most property owners benefit from speaking with a registered tax agent or accountant before selling. This helps ensure your specific circumstances are properly accounted for.