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I would like to enquire about the capital gains tax that I would be liable for if I purchased a house and lived in it for three years. After that, I would lease it out for three more years and then sell it in the seventh year for a $750,000 profit. In this case, would I have to pay any capital gains tax at all?
A property first established as a main residence (MR) immediately after acquisition will be exempt from capital gains tax (CGT) when sold at a profit.
While nominated as the MR, the property can continue to be exempt for another six years if it is rented. So, if sold within those six years it will be exempt from CGT.
Where the property is ‘re-established’ as the main residence before the expiry of the six years, then an additional six-year extension may be possible. The condition is that no other property can be nominated as the MR.
Where a property is first established as a rental it will be liable for CGT when sold at a profit/gain. The amount of capital gain assessed will be apportioned between the days it was occupied as an MR and the days it was a rental. The six-year absence rule extending the exemption is available following the MR period. Re-occupying the property and establishing it as an MR will increase the time period calculated as exempt.
Capital gain is calculated as the difference between the sale price and the cost base.
For CGT purposes, the cost base will include the purchase price, stamp duty, legal fees on purchase and sale, as well as the agent’s commission on sale. Renovation costs will also be added to the cost base.
CGT is payable regardless of how the proceeds of sale are used and regardless of what loan is outstanding at the time of sale. However, where it was first established as an MR the cost base of the property will be the market value when it was first rented.
A concession of 50% discount on the capital gain is available where a property is held for longer than 12 months – meaning only 50% is assessable. This amount will be included on the income tax return for the financial year when the sale occurred.
– Shukri Barbara
CGT on an investment property turned permanent residence after two years
Due to the fast-rising price of real estate in Sydney, my partner and I bought a property earlier than we had planned. We’re now renting it out until we get married in two years’ time. If we move in after two years and sell it possibly 10 years down the track, what would be our CGT obligation? What percentage of CGT would be payable? We are currently living at home with parents and will not be purchasing any other property. I would appreciate any advice you can give.
In this case, because you and your partner have used this property for income-producing purposes from the time you initially purchased the property, you will be subject to a partial capital gains tax liability if you sell the property for a profit in the future.
Assuming the property is held in your individual names (that is, it is not held in a company or a trust), if the initial income-producing period is two years and then after you get married you and your partner move into this property as your principal place of residence for eight years, then this is a total period of ownership of 10 years.
The CGT liability only applies to the period when you used the property for income-producing purposes, which was for 20% of the total ownership period.
Therefore, if for example the total profit of the property is
$300,000 when you sell in 10 years’ time, the taxable component is $60,000 (being $300,000 at 20%).
As you and your partner will have held the property for more than 12 months, this will entitle you to the 50% CGT concession, which will reduce the taxable component to $30,000.
Assuming the property is owned in joint names and in equal shares, then you and your partner will be assessed for CGT purposes individually at $15,000 each, and the tax rates that will be applied will be at your respective individual marginal tax rates.
– Angelo Panagopoulos
Tax deductible loan charges
I have had a rental property for the last seven years. I decided to get out of the fixed loan and change the loan to another bank. The bank charged us an exit fee of $18,000. As the loan was for a rental property at that time, can we claim the $18,000 as it was still for the same rental property?
When you are refinancing a loan, you are effectively ending one loan and commencing a new loan.
In your case, there was already an existing loan for the purpose of funding your investment property for income-producing purposes.
I am assuming also that the original loan did not have any private and/or non-deductible portion of the interest expense. (You can have an investment loan and still have a part of the loan that is either private and/or non-deductible for tax purposes. For example, you may have used an existing investment loan and increased the borrowings to purchase your principal place of residence or for an overseas holiday. In both cases the portion of the loan for these purposes cannot be tax deductible for the interest expense.) However, the exit fees of $18,000 for breaking the original loan are tax deductible.
– Angelo Panagopoulos
The tax experts:
- Shukri Barbara is a CPA, CTA and principal advisor at Property Tax Specialists, with over 30 years’ experience in public practice, specialising in property tax, ownership structures, asset protection, (legally) minimising tax, and cash flow analysis
- Angelo Panagopoulos is principal at Hamilton Reid Chartered Accountants, specialising in property and taxation, asset protection and ownership structures.
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