Capital gains and rental property investment returns

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Capital gains can make up a significant proportion of your investment return on a rental property.

The capital gain is the difference between the sale price you receive when you sell and the cost base. The cost base includes the purchase price, plus buying expenses and the cost of any improvements or repairs you needed to make before you started renting the property out.

If you sell your investment property at a profit, you’ll usually have to pay tax on the capital gain.

Capital gains tax is not charged at a at rate, but rather at your marginal tax rate.

In general, you’ll receive a 50 percent CGT discount if you’ve owned the property for more than 12 months, so you’ll be liable to pay tax on only half of the gain. 

For example, if you bought an apartment in 2002 for $285,000 including purchase costs and sold it in 2016 for $500,000, the capital gain is $215,000. Since you’ve owned the property for more than a year, you’ll receive a 50 percent CGT discount when tax is calculated. That means $107,500 of the gain is taxable at your marginal tax rate for the year.

This ruleapplies to properties purchased on or after September 21, 1999 when the CGT discount was introduced for pro ts made on assets that had been held for more than 12 months.

Different rules apply to properties purchased before September 21, 1999 and there are many exceptions.

VARIATIONS

CGT was introduced on September 20, 1985. If you bought the property before that date you won’t usually have to pay tax on profits from selling.

The family home is also exempt from CGT. But you will have to pay CGT on pro ts made in selling a holiday home or other investment property that you don’t rent out. You may be able to include the costs of ownershipin the property’s cost base, which would reduce the CGT liability.

Special rules also apply to capital gains made on properties you’ve inherited, and to gains you make where your investment property started out as your primary residence or became your home after having been rented out for a period of time.

INVESTMENT LOSSES

Some investors make a capital loss when they sell their rental property. In this case, the loss can be offset against capital gains made on other investments.

If you made a net capital loss during the year, you can carry it forward and deduct it from capital gains you make in future. Capital losses can only be deducted from capital gains: you can’t claim a capital loss against income you’ve earned.

The CGT rules can be complicated. It’s wise to seek professional advice to see what applies in your situation. 

To download a free ebook on new financial year taxation tips for property investors, click here.