Selling Your Rental Property: Tax Guide

Selling Your Rental Property: Maximise Tax Deductions and Get the Maximum Refund

Selling your rental property comes with significant tax implications. Understanding how to handle Capital Gains Tax (CGT) is crucial for optimising your income tax return, ensuring you maximise tax deductions and achieve the maximum refund. This guide will walk you through the key aspects of CGT in Australia, with practical examples to help you navigate the process.

Contents

1. Calculating Capital Gains
2. Adjustments to the Cost Base
3. Adjustments to the Selling Price
4. Implications of Depreciation and Capital Allowances
5. Periods the Property Wasn't Rented
6. Holding Costs
7. Checklist for Calculating Capital Gains
8. Example Calculation
9. Gotax Deduction Grabber App

Calculating Capital Gains

The capital gain or loss when selling your rental property is the difference between your cost base and your capital proceeds.

• Cost Base: Includes the original purchase price, along with costs associated with buying, owning, and improving the property.
• Capital Proceeds: The amount you receive when you sell the property.

Example:
If you bought a property for $500,000 and sold it for $700,000, your capital gain would be $200,000.

Adjustments to the Cost Base

Adjustments to the cost base can have a significant impact on your capital gain or loss.

• Improvements: Capital improvements made to the property can be added to the cost base.
• Depreciation and Capital Allowances: Ta deductions previously claimed for depreciation and capital works must be subtracted from your cost base.

Example:
If you claimed $20,000 in depreciation, your adjusted cost base would be $480,000 ($500,000 - $20,000).

Adjustments to the Selling Price

In some cases, you may need to adjust the selling price. For example, if you paid for repairs or renovations to increase the property’s value, these costs might be tax deductible.

Implications of Depreciation and Capital Allowances

Depreciation and capital allowances reduce your cost base, which increases your capital gain. It's essential to keep accurate records of all depreciation and capital works tax deductions claimed over the term of the rental.

Periods the Property Wasn't Rented

If the property was not rented out for any period, you must adjust your calculations accordingly. Only the tax expenses incurred during the rental period can be included in your cost base.

Holding Costs

Holding costs such as interest, insurance, maintenance, and council rates can be included in your cost base if they were not previously claimed as rental tax deductions.

Example:
If your holding costs amount to $10,000 annually, and you owned the property for 5 years, you can add $50,000 to your cost base, provided these costs were not claimed as tax deductions.

Checklist for Calculating Capital Gains

1. Determine the Cost Base:
   • Purchase price
   • Legal fees
   • Stamp duty
   • Improvements
   • Holding costs (if not claimed as deductions)
2. Adjust for Depreciation and Capital Allowances:
   • Subtract any depreciation and capital works deductions claimed
3. Calculate Capital Proceeds:
   • Sale price
   • Subtract selling costs (e.g., agent commissions, legal fees)
4. Calculate the Capital Gain or Loss:
   • Subtract the adjusted cost base from the capital proceeds

Example Calculation

• Cost Base: $500,000 (purchase price) + $50,000 (holding costs) - $20,000 (depreciation) = $530,000
• Capital Proceeds: $700,000 (sale price) - $10,000 (selling costs) = $690,000
• Capital Gain: $690,000 - $530,000 = $160,000

Gotax Deduction Grabber App

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Selling a rental property involves several tax considerations, especially around capital gains. By understanding how to calculate your capital gain and making the necessary adjustments, you can maximise your tax deductions and optimise your income tax return. For a hassle-free tax return experience, consider using Gotax.com.au, Australia's easiest, cheapest, and smartest online tax service.

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