Calculating capital gains tax can be fairly tricky; the law is so complex that people sometimes pay more than they should. When you sell an investment property it might appear obvious how much capital gain you made from when you bought it, but if you held the property for many years, the only way you will know how much it really cost is to keep good records.
Keeping all of your paperwork in order will make sure you factor in all of the costs incurred that could reduce your CGT liability substantially. Particularly those you weren’t able to claim as a deduction or depreciation whilst you held the property.
We’ll use an example to explain the benefits of this further:
Andrew and Anne purchased some land in 2002 for $100,000. They borrowed $70,000 on a 5-year 8%pa fixed interest loan. Rates on the property were $880pa. In 2004, they built a house on the land costing $130,000 plus a further $25,000 on fencing, landscaping and a pool. From 2004 to 2013 they rented the house out. In 2014 they spent an additional $10,000 repainting and repairing and sold it for $375,000. Legal fees on the purchase and sale were $1,000 each. The real estate agent commission of 2.5% applied on the sale plus advertising costs of $1,500.
|Cost of land in 1993||$100,000|
|Stamp duty on purchase||$600|
|Legal fees on purchase||$1,000|
|Interest on borrowings – 5 years||$28,000|
|Property rates – 5 years||$4,400|
|Cost of building house||$130,000|
|Landscaping, fencing, pool||$25,000|
|Painting and repairing||$10,000|
|Total cost of acquisition||$299,000|
|Less sales commission||-$9,375|
|Total receipt from sale||$363,125|
|Net capital gain||$64,125|
Note: You cannot include any of the items listed in the table above for which you have already claimed a tax deduction, or for which you can still claim a deduction through an amended income tax assessment.
Over a 12-year timeframe most of this would have been forgotten, and the net capital gain would have been much higher. Andrew and Anne would have paid far more CGT than they should have.
If you sold your investment tomorrow, would your record-keeping save you money or cost you thousands? Speak to a licensed adviser on (07) 3040 4840 if you have any questions about your investment property.
The advice on this site may not be suitable to you because it contains general information that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Please also refer to our general advice warning under contact us tab on our website. The article is based on information available at the time of writing only and therefore care should be taken as to the accuracy of the content.
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