How much capital gains tax do I need to pay?

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Mrs Robbins
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Joined: Fri Jul 19, 2013 2:25 am

How much capital gains tax do I need to pay?

Post by Mrs Robbins »

Hi experts,

I have a property that I might be selling since I plan to migrate to the UK sometime next year. I was just a bit confused about the whole capital gains tax part since I have never sold a property before, nor did I think I would have to (so I never looked it up really – even the move was not planned).

ANYWAY, I would really appreciate it if you could tell me in brief how CGT is calculated so that I would have an idea of how I would have to pay.

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Otto Dargan
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Re: How much capital gains tax do I need to pay?

Post by Otto Dargan »

Hi and welcome to the forums Mrs Robbins,

Capital gains tax is calculated by taking the capital proceeds you received when you sold the house minus the cost base of your property. This cost base includes the price you paid for the house, incidental costs and any building depreciation that you may have claimed before.

For example,
Suppose that you sold your property for $400,000 and your proceeds are $400,000. Now if you had bought your property for $300,000 excluding $2,000 in legal fees when buying, $20,000 in stamp duty, $2,000 legal fees when selling, $10,000 agent’s commission when selling and $50,000 claimed in building depreciation, then your cost base is $384,000.

This means that your gross capital gain is $16,000 (i.e. $400,000 - $384,000). If you have owned the property for more than one year then your next taxable capital will be halved so you will only have to declare $8,000 in your tax return. This amount is then added to your regular income on which you will have to pay tax just as you would with your regular income.

Please keep in mind that the above is only for individuals and not for trusts, super funds or a company for which the CGT policies are different.

I hope that this clears up your doubts on this matter. You may want to speak to an accountant who specialises in tax for property investors for more details since we do not have an expertise in financial matters.

Cheers,
Otto
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oldisGOLD
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Joined: Thu Jun 20, 2013 6:29 pm

Re: How much capital gains tax do I need to pay?

Post by oldisGOLD »

Hi, I’m also new to the property investing business myself – have been approached to buy a small house near the sea actually.

I’ve heard about this term called “negative gearing” that I would like to know more about. I honestly don’t have the time to go to all those property seminars and even this beach house is being sold by a friend who needs the money.

Even if you aren’t the experts in money matters, I still think a basic explanation of the term would be more helpful than a detailed one which may prove to be more confusing to a layman such as me!

So if you wouldn’t mind, please try to explain negative gearing to me :)

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Otto Dargan
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Re: How much capital gains tax do I need to pay?

Post by Otto Dargan »

oldisGOLD, negative gearing is when you borrow to invest but in such a way that you make a loss which allows you to get into the market early and increase your investment income slowly to cover the expenses.

For example,
Suppose you rent out the beach house for $25,000 a year and you spend about $30,000 in interest and running costs (maintenance, repairs, etc.). On the other side you are earning $100,000 a year at your full time job.

Now the loss on your investment property means that your taxable income can be reduced by offsetting it with the loss amount, i.e. $5,000 so your final taxable income will be $95,000.

Furthermore, you can also claim depreciation benefits on the property which will allow you to reduce your taxable income further. For e.g. if you claimed $5,000 in depreciation then including your rental income of $25,000 and running costs of $30,000, your taxable income can be reduced by $15,000.

However, please keep in mind that although you are saving on tax on one hand, you are still losing money on the other. This mostly used by investors if the property’s growth is more than the holding costs, as well as in order to own more investment properties without having to pay too much for them.

We have also come across a few clients who want to move their home loan to their investment property to take advantage of the tax benefits however this is not possible since the Australia Tax Office (ATO) will look at your loan purpose and not what it is secured on. This means that moving the loan over will not change what your loan was originally for and not make the interest tax deductible.

Cheers,
Otto
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oldisGOLD
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Joined: Thu Jun 20, 2013 6:29 pm

Re: How much capital gains tax do I need to pay?

Post by oldisGOLD »

Hmm okay, so I can use it to reduce my taxes by making the costs higher than the income.. kinda kooky but yeah, I guess it does work if you have a lot of properties. And I imagine you can raise the rent later when you want.

Another thing I heard about which was similar to the first reply in the thread was about capital loss. Can you use that for tax reduction as well?

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Otto Dargan
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Re: How much capital gains tax do I need to pay?

Post by Otto Dargan »

oldisGOLD, “capital loss” is when your total proceeds are less than your cost base.

You cannot however use this to reduce your taxable income however you can use it to offset it against capital gains in case you have other properties. Therefore it is most useful to an investor who has more than one investment property.

Cheers,
Otto
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oldisGOLD
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Joined: Thu Jun 20, 2013 6:29 pm

Re: How much capital gains tax do I need to pay?

Post by oldisGOLD »

Great, thanks for clearing up those things. Now I just need to work out how much my loan payments will be each month.. I’m trying to work it out in Excel haha

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Otto Dargan
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Re: How much capital gains tax do I need to pay?

Post by Otto Dargan »

Hi oldisGOLD,

It may be easier and faster if you just try out our Loan Repayment Calculator. Just enter in your loan details and specify if you would like to pay weekly, monthly or twice a month and it will give you an estimated value of your loan payments.

If you would like to speak to one of our experienced mortgage brokers who can help you with your mortgage then you can send us an online enquiry or even call us directly on 1300 889 743.

Cheers,
Otto
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P | 1300 889 743
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