The Implications of Capital Gains Tax When Selling An Investment Property

Anyone thinking of selling their investment property needs to be aware of the Capital Gains Tax implications. Mr Matthew Mousa, property acquisition and tax expert at TLK Partners, turns his attention to what happens when a rental property is sold.

The Australian Taxation Office's Rental Property Owners Tax Guide clearly says that when an owner sells or ceases to own a rental property, he or she is subject to a capital gains event, provided the property was acquired after 19 September, 1985.

The timing of the CGT event

The Tax Guide states that the sale or other disposal of a property happens when the contract is signed, and not when the settlement goes through. If there is no contract, the date it occurred was when change of ownership took place. Even if someone is still waiting for approval for a loan, the date of the contract is still the one that applies, Matthew explains.

What happens if improvements were made after 1985?

"Unfortunately, certain capital improvements made to a property after 1985, even if it was bought before 1985, will be subject to capital gains tax regulations," Matthew says.

What exactly is a capital gain or a capital loss?

Capital Gain: If the money made when a property is sold is more than the money spent to buy it (cost base), it’s a capital gain. There are certain exclusions from the cost base that needs to be factored in. "In a nutshell, this means any capital works deductions already claimed or which can still be claimed, has to be excluded," Matthew says.

Capital Loss: A capital loss occurs when it’s the other way round – if the reduced cost base is more than what the seller got for the property.

Co-owners in a rental property will make a capital gain or loss proportionate to their interest in the partnership. If it’s a 50-50 ownership between two people, each will have to deal with half the total Capital Gains or Losses incurred when the property was sold.

What has to be included in the cost base?

Any incidental expenses incurred in acquiring, holding and disposing of the asset must be included in the cost base. These include legal fees, stamp duty and estate agents’ commission.

What is a rollover?

In certain situations, capital gains or losses do not apply. Sometimes a “rollover” means that capital gains tax can be disregarded. This happens in situations such as when a property is destroyed by a natural disaster like fire or floods, or a court order stipulates the transfer of the property to an ex-spouse in a divorce settlement.

"It also applies when a property is compulsory acquired," says Matthew. "Also known as “resumption”, this is when an authority like the government acquires privately-owned land or property, sometimes against the wishes of the owner."

Check with the experts

The sale of a rental property might or might not be subject to capital gains tax and, if it does, it might net a capital gain or a capital loss. The uncertainty a property owner might feel about where exactly they stand, can be a big worry. "Consulting an expert in capital gains tax is strongly recommended to make sure nobody is being short-changed - neither the owner or the taxman," Matthew concludes.

TLK Partners Wealth Management Companies Kingsgrove, Beverly Hills | Tax Accountant & Agent | Property Adviser are wealth advisers serving enterprises and private individuals who hope to take care of their future through sound financial management. Visit their website or contact them at (02) 8090 4324 for an appointment to discuss your financial management and investment needs.

This material is of a general nature only, it does not take into consideration your financial circumstances, needs or objectives. Before making any decision based on this content, you should assess your own circumstances, seek professional advice or contact our office to be directed to the appropriate professional. Whilst all care has been taken in presenting the material neither TLK Partners or its associated entities guarantee that the material is free of error and, the information may have changed since being published.

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