How to calculate capital gains tax for real estate?

Learn more about investing in Australian real estate & share your ideas with other investors.
Post Reply
User avatar
albee
Posts: 45
Joined: Wed Apr 07, 2010 12:04 pm

How to calculate capital gains tax for real estate?

Post by albee »

Hi

I have been looking into getting into property investment and have attended a few seminars with a friend of mine. The last time we met I overheard other investors talking about how capital gains tax and whatnot. I wanted to ask them more about but they were quite busy and moved off soon. My friend also did not know much about it so I wanted to ask you guys directly since you deal with property.

User avatar
Otto Dargan
Mortgage Specialist
Posts: 7730
Joined: Sat Sep 06, 2008 5:55 pm
Location: Sydney, Australia
Contact:

Re: How to calculate capital gains tax for real estate?

Post by Otto Dargan »

Hi albee,

Capital gains tax comes into play when you sell a property and you pay a tax for that. It can be calculated by deducting the value of your property from the selling price. The property value used should include the price you bought it for including incidental costs and less any building depreciation that you have already claimed.

For e.g.:
Suppose you had a property you bought for $200,000 and paid $2000 in legal fees to buy , $20,000 in stamp duty and have claimed $50,000 in depreciation. Now if you sold this property for $400,000 with $2000 in legal fees, $10,000 for your agent then your capital gains would be $116,000.

This means that you would have to declare this capital gain in your tax returns the same year you sell your property and pay for it just as you would do for any income source. If you owned the property for more than one year then you would only have to declare half of this value.

On the other hand if the figure is negative, then it is considered a capital loss. Capital losses can only be used to offset your capital gains not your regular income so it cannot be used to reduce your tax payable otherwise.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

User avatar
albee
Posts: 45
Joined: Wed Apr 07, 2010 12:04 pm

Re: How to calculate capital gains tax for real estate?

Post by albee »

Oh oh.. but I thought we could use our property costs to reduce our total taxes or is that not the same as capital gains?

User avatar
Otto Dargan
Mortgage Specialist
Posts: 7730
Joined: Sat Sep 06, 2008 5:55 pm
Location: Sydney, Australia
Contact:

Re: How to calculate capital gains tax for real estate?

Post by Otto Dargan »

Hi albee,

You may be referring to negative gearing.

What happens here is that if your annual costs of maintaining your investment property (interest and running costs) are more than your investment income and you make a loss, you can use this loss to reduce your taxable income.

For e.g. if you are renting out the property for $20,000 every year but pay $30,000 in interest and running costs then you have an annual loss of $10,000. Now if your income was $100,000 then you could use this loss and pay tax on $90,000 only. You can also claim depreciation benefits on your property to reduce your taxes by adding the depreciation value on top of your losses in the same way.

Keep in mind that ultimately you want to make sure that you are making a profit on your investment property. Property investors usually make sure that there is capital growth in the property despite it being negatively geared which will make them a profit in the long run.

If you would like more property investment advice, it is better if you speak to a specialist such as a property coach or an accountant who specialises in property to get more accurate information.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

User avatar
albee
Posts: 45
Joined: Wed Apr 07, 2010 12:04 pm

Re: How to calculate capital gains tax for real estate?

Post by albee »

Okay thanks for helping with this. I will definitely bring this question up at the next meet. I think your explanation was quite good though, maybe you guys should get into property investing too :D

airwolf
Posts: 39
Joined: Wed Jul 03, 2013 8:32 pm

Re: How to calculate capital gains tax for real estate?

Post by airwolf »

Hey I just came across this thread while looking for advice on property investing. I thought it was pretty helpful too. Do you have any other ideas that would be helpful for first time investors.

I haven’t even gone to a seminar or anything like albee because I am just so busy with work with the holidays coming up.

Thanks in advance

User avatar
Otto Dargan
Mortgage Specialist
Posts: 7730
Joined: Sat Sep 06, 2008 5:55 pm
Location: Sydney, Australia
Contact:

Re: How to calculate capital gains tax for real estate?

Post by Otto Dargan »

Hi airwolf,

We actually have some articles which you might find helpful for planning your investments.

Firstly it is good to learn about the common mistakes that new investors make so that you can avoid making them yourself.

Some of these include:
  • Rushing into a purchase
    Some investors try to get into property investment without thinking much or planning their expenses only concerned with instant benefits. Many often forget that property investment is a long term strategy and that a wrong decision can be very costly.
  • Making a purchase based on emotion
    Finding a good property requires many hours of research and planning, however many buyer choose a property based on a friend’s “advice” or just because they “liked” it. While making a purchase, you need to think from a business perspective, do your research, plan your investment strategy. It may be more inconvenient and take you longer, but it will ensure that you have made a better choice.
  • Getting fooled by marketing
    Good marketing and sales pitches can overwhelm buyers if they do not have much knowledge about real estate and they can end up buying a property which is well below the quoted price.
We also have a short article about the factors that affect property values.
These can include:
  • Population and demographic shifts
    A larger local population can mean more prospective buyers however you also need to think about the type of people living there; they can be retirees or university students or married couples with kids. Growth of population in the area is also important especially where in areas immigrants are located.
  • Location
    The location of property is one of the biggest factors to affect prices since a good view of the sea or short distance to the CBD can allow you to charge higher when renting or selling.
  • The land component
    Most buyers also do not realize that from the total value of the property, only the land value will be increasing with the building value depreciating. That means that when you buy a property, you should make sure that you are spending more on the land to ensure that you can take advantage of the capital growth in the property.
  • And more..
These articles were written with the help of various local property investment experts and reflect their opinions and views and the tips within should be taken at your own discretion

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

airwolf
Posts: 39
Joined: Wed Jul 03, 2013 8:32 pm

Re: How to calculate capital gains tax for real estate?

Post by airwolf »

Fantastic! Thanks Otto, I will look through these and share them with my friends as well.

User avatar
Benny Dubria
Mortgage Specialist
Posts: 26
Joined: Mon Apr 29, 2013 3:00 pm
Location: Sydney, Australia
Contact:

Re: How to calculate capital gains tax for real estate?

Post by Benny Dubria »

Hi Alibab,

I strongly recommend you speak with your accountant in terms on how Capital Gains Tax is calculated as this is more tailored to their services.

Also, please refer to the ATO website also.

Regards,

Benny
Benny Dubria
Senior Mortgage Broker
P | 1300 889 743 E | benny@homeloanexperts.com.au
Home Loan Experts

Post Reply