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Well, if I have to discuss the most popular wealth-building strategies in Australia, a single day would not be enough.

But never mind, it is something that most of you would like to learn, and for the same, I have written a brief blog covering significant points on calculating capital gains on property in Australia.

The first thing that comes to mind with capital gains is TAX. Hence, it is important for property owners to calculate the CGT accurately to avoid unwanted tax bills.

Let me solve your query in the next 7 minutes on how to calculate capital gains on property in Australia.

So, be ready with a pen, paper, and calculator. Let’s start with the calculations.

For First-Time Property Sellers > What is Capital Gain?

As the term says, capital gain is the “profit” you make on “selling” a property. It can be any property asset. Selling it for more than the actual cost is considered a gain, booking your profits.

Let me share a quick example over here.

For instance, if you purchased a property for $500,000 and sold it for $700,000, your capital property gain is $200,000.

Also, with a profit of $200,000, you invite the Australian Taxation Office to be in the picture.

The ATO (Australian Taxation Office) requires you to pay tax on this gain, but certain exemptions (like the main residence rule) might apply.

If you have to ask why it is mandatory to pay these taxes to the Australian Government, the answer is here: Doing so ensures property investors and sellers contribute their fair share to the economy.

Covering the Key Concepts in Capital Gain Tax (CGT)

As a property accountant, I must share the basics of CGT before sharing the step-by-step calculations.

So, let me have your attention here for a minute.

1. Main Residence Exemption:

So, if the property you keep on sale is your primary home, it is 100% exemptable from CGT.

2. Holding Period:

If you’ve owned the property for more than 12 months, you may qualify for a 50% discount on your taxable capital gain in Australia.

Depreciation Adjustments:

Depreciation claimed during the ownership period can reduce your cost base. This ultimately results in an increase in capital gain.

Income Inclusion::

The tax you must pay is added to your existing income slab for the current financial year. The same is calculated or taxed at your marginal rate.

The taxable portion of your gain is added to your existing income for the financial year and is taxed at your marginal rate.

How to Calculate Capital Gains on Property (Step-by-Step Guide)

Here, I shall be helping all the property sellers in Australia who are looking forward to calculating capital gains.

Step 1: Checking the Property’s Cost Base

Some financial terms are used in the cost base calculations; let me make it more transparent for you by bifurcating the same.

  • Purchase Price: The actual/total price you paid at the time of buying the property.
  • Acquisition Costs include stamp duty, legal fees, and property inspections.
  • Improvement Costs: Any renovations or structural upgrades.
  • Holding Costs: Rates, maintenance, and interest on loans (if the property wasn’t income-producing).
For example, if you purchased a property in Australia for $500,000, spent $30,000 on stamp duty, and $20,000 on renovations, your cost base would be $500,000 + $30,000 + $20,000 = $550,000.

In short, the cost base is the sum of the purchase price, acquisition costs, improvement costs, and holding costs of your property.

Step 2: Calculating the Property’s Sale Price

Now, this is very interesting as your property’s sale price doesn’t conclude with the price for which you finalize the sale deal. Here is the catch: it includes subtracting the commission or fees you must pay your property agent.

In short, all the selling costs are subtracted from the sale price.

For example, If you sell the house for $700,000 and have paid $15,000 for agent fees, your sale price will be shown as $700,000 - $15,000 = $685,000.
Step 3: Let’s Subtract the Cost Value of Property from the Sale Price

We are just a step closer to concluding the capital gain on your current property deal.

To find your capital gain, subtract the cost base from the sale price.

For example, if the cost base price is $685,000, and the sale price is $550,000, the capital gain is $685,000 - $550,000 = $135,000
Step 4: Let’s Now Apply the Possible Exemptions & Discounts
Let us assume the Sale Price: $750,000 Let us assume the Cost Base: $500,000 (including purchase price, stamp duty, and renovation costs or any of those) Now, let us calculate the Capital Gain: $750,000 - $500,000 = $250,000

Any exemptions or discounts that you hold are applied in the final step for calculating the taxes. Now, here is where your property accountant comes into the picture. They help you understand the exemptions or discounts you are liable for to reduce capital gains taxation.

Case 1: Applying the 50% Discount

The 50% discount rule depicts that if the property has been owned for over 12 months, the capital gain is reduced to 50%. $250,000 ÷ 2 = $125,000.

This $125,000 is added to your annual income and taxed at your marginal rate.

Case 2: Main Residence Exemption

The main residence exemption rule is very simple. It says that if you have been staying at the same property for which you are calculating the CGT for the entire ownership period, it is fully exempted from CGT.

This means that no tax is to be paid to the Australian Government, and the entire profit is non-taxable.

When Does the Capital Gain Tax Get Complicated?

There are a few special cases where calculating the CGT becomes highly complicated and when you need to hire a property accountant to manage the calculations.

Australian property taxes are challenging to tackle independently for various reasons, including special cases or property laws.

  • While you live in an inherited property in Australia, the cost base is calculated on the date when the main owner has acquired the property (the purchasing price). However, if the inherited property you reside in is purchased before 20 September 1985 (when CGT laws began), you may not need to pay CGT.
  • Renting out your property can partially impact the CGT in various ways. It is best to consult a property accountant for the same.
  • CGT rules are stricter for non-residents. In this case, it is also best to reach out to a property accountant to calculate the accurate CGT.

How Can I Automate My Capital Gain Calculations?

Automating your capital gain calculations can save time, reduce errors, and ensure tax compliance. Platforms like The Property Accountant are specifically designed to streamline this process. Here’s how you can use such tools effectively:

Easy Tracking of Costs
  • When you buy a property, you can input and track essential details such as the purchase price and associated costs (e.g., stamp duty, legal fees).
  • This automated tracking ensures that all relevant data is available for accurate calculations of capital gain
Expense Management
  • Record ongoing expenses such as renovations, maintenance, and improvements directly within the platform.
  • These expenses are automatically factored into your calculations, helping you reduce your taxable capital gain.
Automated Reports
  • Generate detailed capital gains reports with a click. These reports summarize your profits and tax obligations, making it easier to understand your financial position and prepare for tax filings.
Tax Compliance
  • The platform adheres to ATO guidelines, ensuring your calculations are accurate and deductions or exemptions are properly applied.
  • Automated compliance reduces the risk of errors and helps you stay within legal boundaries.

By using these features in tools like The Property Accountant you can simplify the entire capital gains calculation process, making it more efficient, accurate, and stress-free.