So you’re thinking of selling your rental property. There are a few things to take into consideration, one of them being how this will affect your tax.
You will need to work out if you’ve made a capital gain or a capital loss, but what does this mean? Basically, a capital gain is when you sell the property for more than it has cost you. A capital loss on the other hand is when you sell the property for less than it has cost you.
So what is the “cost” of the property? It’s the amount you paid for the property, plus certain costs associated with buying, holding and selling it. Some amounts are excluded from the property’s costs; for example deductions you’ve already claimed for building costs.
If you make a net capital gain in an income year, you’ll generally be liable for capital gains tax (CGT). If you make a net capital loss you can carry it forward and deduct it from your capital gains in later years.
If you acquired the property before the CGT came into effect on 20 September 1985, you disregard any capital gain or capital loss. However, you may make a capital gain or capital loss from capital improvements made since 20 September 1985, even if you acquired the property before that date.
You can generally reduce your capital gain by 50% if you have owned the property for 12 months. Keep in mind though that it is the sale contract dates that are critical, not the settlement dates. So make sure that the contract dates have at least 12 months between them.
When you sell your rental property you’ll need to reasonably divide up the sale price between the property and any depreciating assets in the property. This is because there are separate tax consequences for each.
Something else to consider is if the rental property was your main residence for part of the time you owned it, or if it was your main residence and you rented out a part of it, you may be entitled to a partial exemption from capital gains tax.
The final decision of the right time to sell is a very personal one, so it’s best to seek professional advice before proceeding, so speak with your sales agent, and accountant or financial planner before making your decision. You can also find further details on the ATO website here.
The information provided in this article is for use of a general nature only and is not intended to be relied upon, nor be a substitute for, specific professional advice from a financial adviser.