How to Sell Your Property in Australia
Table of Contents
Selling a property in Australia involves several considerations, including understanding how capital gains or losses apply. In this guide, we will walk you through the process of selling a property and explain the implications of capital gains tax (CGT). Whether you are a homeowner or a co-owner of a rental property, this information will help you navigate the selling process.
Understanding Capital Gains or Losses
When you sell or dispose of a rental property, you may make a capital gain or loss. A capital gain or loss is determined by calculating the difference between the cost base of the property (including acquisition and improvement costs) and the amount received upon disposal.
Here’s how capital gains or losses apply:
- Net Capital Gain: If you make a net capital gain in an income year, you will generally be liable for capital gains tax (CGT). This means you will need to report the gain in your tax return and pay tax on it.
- Net Capital Loss: If you make a net capital loss, you can carry it forward and deduct it from your capital gains in later years. This allows you to offset any future gains and potentially reduce your tax liability.
To calculate your CGT, you can use the ATO’s calculator or follow the steps provided. Additionally, the myTax platform offers guidance on how to enter your capital gains or losses when completing your tax return.
Main Residence Exemption
In certain cases, you may be entitled to a full or partial main residence exemption if you lived in the property before renting it out. This exemption can help reduce or eliminate your CGT liability.
Here are the scenarios where the main residence exemption may apply:
- Former Home as Main Residence: If you lived in the property before renting it out, you may be eligible for a full main residence exemption. This means that the period you lived in the property will not be subject to CGT.
- Renting Part of Your Home: If you rented out only a portion of your home while continuing to live in it, you will be entitled to a partial main residence exemption. This allows you to exclude the portion of the property used as your main residence from CGT.
For more detailed information on CGT and eligibility for the main residence exemption, you can download a summary fact sheet in PDF format from the https://downunderrealty.com website.
Co-ownership and Capital Gains or Losses
If you co-own a property, any capital gains or losses will be divided according to your ownership interest. Each co-owner will need to report their share of the gain or loss in their tax return for the relevant year.
The application of capital gains or losses depends on when the property was acquired:
- Acquired Before 20 September 1985: If you acquired the property before this date, CGT will only apply to capital improvements made after 20 September 1985.
- Acquired After 20 September 1985: If you acquired the property after this date, CGT will apply to the entire property.
To better understand how capital gains are calculated in specific scenarios, refer to the videos provided on the https://downunderrealty.com website.
Working Out Your Costs
When determining your capital gains or losses, it is important to calculate the cost base and reduced cost base of your property. These figures include the initial purchase price, as well as any incidental costs associated with acquiring, holding, and disposing of the property (such as legal fees, stamp duty, and real estate agent’s commissions).
However, it is important to note that amounts claimed or claimable as tax deductions cannot be included in the cost base.
To illustrate this, let’s consider an example:
Example: Capital Gains on the Sale of a Co-owned Rental Property
Karl and Louisa purchased a residential rental property in November 2016 for $750,000. They incurred $30,000 in purchase costs, including stamp duty and legal fees. Additionally, they spent $6,000 on property improvements. Over the years, they claimed $5,000 in decline in value deductions and $35,000 in capital works deductions. In June 2021, they entered into a contract to sell the property, and in November 2021, it was sold for $900,000. The costs of sale, including legal fees, amounted to $10,000.
The cost base calculation would be as follows:
A + B + C + D – E – F = Cost Base
Where:
A = Purchase price
B = Purchase costs
C = Cost of property improvements
D = Costs of sale
E = Capital works deductions
F = Decline in value deductions
In this case:
$750,000 + $30,000 + $6,000 + $10,000 – $35,000 – $5,000 = $756,000
The capital gains outcome would be:
Proceeds – Cost Base = Capital Gain Outcome
$900,000 – $756,000 = $144,000
Since the property has been owned for more than a year, the discount capital gain rules would reduce the capital gain to $72,000. As Karl and Louisa co-owned the property, they would each have a capital gain of $36,000, which they would need to report in their tax return for the relevant year.
For more information on calculating your costs, refer to the ATO’s guidance on rental properties.
Capital Expenses
Capital expenses are incurred when purchasing, acquiring, selling, or disposing of a rental property. These expenses are considered part of the property’s cost base and can help reduce the amount of CGT payable upon sale.
Examples of capital expenses include:
- Conveyancing costs paid to a conveyancer or solicitor
- Title search fees
- Valuation fees (when conducted privately by your solicitor)
- Stamp duty on the property transfer
If you have incurred any of these expenses, be sure to include them when calculating the cost base of your property.
GST on Rental Properties
In general, the sale of existing residential premises in Australia is considered input taxed for GST purposes. This means that you cannot claim GST credits on costs associated with buying or selling the property, and GST does not apply to rental payments received.
However, if you build new residential premises for sale, you may be liable for GST on the sale at settlement. Depending on your turnover, you may also need to register for GST. If you register for GST, you may be entitled to GST credits on construction and sale costs, even if the premises were rented before being sold.
For more detailed information on GST and residential property, consult the ATO’s resources.
Foreign Resident Capital Gains Withholding
Foreign resident capital gains withholding (FRCGW) applies when selling a rental property in Australia with a contract price of $750,000 or more. The FRCGW tax rate is 12.5%.
Australian resident sellers who do not wish to have amounts withheld by purchasers can complete and lodge a clearance certificate application form. This will exempt them from the withholding requirements.
For further information on foreign resident capital gains withholding, refer to the ATO’s guidance.
In conclusion, understanding how capital gains or losses apply when selling a property is crucial for Australian homeowners and co-owners of rental properties. By familiarizing yourself with the rules and regulations surrounding CGT, main residence exemptions, and other relevant considerations, you can navigate the selling process effectively and make informed decisions.
