Key Takeaways
- Capital gain is the profit you make from selling a property for more than its cost base.
- The ATO requires you to pay Capital Gains Tax (CGT) on this profit, but exemptions like the main residence rule may apply.
- Holding a property for over 12 months can qualify you for a 50% CGT discount.
- Calculating CGT involves determining the property's cost base (purchase price + costs) and subtracting it from the sale price.
- Automation tools like The Property Accountant can simplify tracking costs and calculating gains.
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.
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.
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 explain how property sellers in Australia can calculate capital gains in a clear, step-by-step way.
Step 1: Checking the Property's Cost Base
Some financial terms are used in the cost base calculations; let me make these clearer by breaking them down.
- Purchase Price: The total price you paid for the property.
- Acquisition Costs: Stamp duty, legal fees and 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 for $500,000, spent $30,000 on stamp duty and $20,000 on renovations, the cost base would be $550,000.
In short, the cost base is the sum of the purchase price, acquisition costs, improvement costs and holding costs.
Step 2: Calculating the Property's Sale Price
The sale price is the final amount received after subtracting selling costs such as agent commissions and advertising.
For example, selling for $700,000 with $15,000 in agent fees results in a net sale price of $685,000.
Step 3: Subtract the Cost Base from the Sale Price
To find the capital gain, subtract the cost base from the sale price.
Example: If the sale price is $750,000 and the cost base is $500,000, the capital gain is $250,000.
Step 4: Apply Exemptions & Discounts
Apply any eligible exemptions or discounts (for example, the 50% discount for assets held over 12 months) to calculate the taxable capital gain.
Example: Sale $750,000 − Cost base $500,000 = Gain $250,000.
Case 1: Applying the 50% Discount
If you've held the property for over 12 months, you may be eligible for a 50% CGT discount. $250,000 ÷ 2 = $125,000.
Case 2: Main Residence Exemption
If the property was your main residence for the entire ownership period, it may be fully exempt from CGT.
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 tax 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 designed to streamline this process . Here's how you can use such tools effectively:
Easy Tracking of Costs
- When you buy a property, input and track essential details such as purchase price and associated costs (e.g., stamp duty, legal fees).
- This automated tracking ensures all relevant data is available for accurate capital gain calculations.
Expense Management
- Record ongoing expenses such as renovations, maintenance and improvements directly within the platform.
- These expenses are automatically factored into your calculations, helping reduce your taxable capital gain.
Automated Reports
- Generate detailed capital gains reports with a click. These reports summarize profits and tax obligations, making it easier to prepare for tax filings.
Tax Compliance
- The platform adheres to ATO guidelines, ensuring 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 capital gains calculation process to make it more efficient, accurate, and stress-free.
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