Buying and selling an investment property does not only involve annual rental income or loss.

You also have to keep in mind the tax you have to pay when you sell it, known as Capital Gains Tax (CGT).

In the year of sale, you need to declare this capital gain or loss in your tax return.

How is your capital gain calculated?

A capital gain is calculated by taking the capital proceeds you receive less the cost base of your property.The proceeds include the amount of money the property was sold for.

The cost base generally includes the amounts of money you paid for the property, plus incidental costs, less building depreciation claimed along the way.

An example capital gain calculation

So, if an investor sold their property for the list price of $400,000, their proceeds are $400,000. If they bought the property for $200,000, and paid $2,000 of legal fees to buy, $20,000 of stamp duty to buy, $2,000 of legal fees to sell, $10,000 agents commission to sell and claimed $50,000 of building depreciation, their cost base is $284,000.

Their gross capital gain is the proceeds less the cost base being $116,000. If they owned the property for more than one year the net taxable capital can be halved, so they only declare $58,000 in their tax return.

This amount is added to their regular income and tax is paid accordingly just like regular taxable income.

What is a capital loss?

A capital loss is calculated very similar to a capital gain. While a capital gain is added to your regular income to calculate your tax, a capital loss cannot be used to offset your regular income.

It is carried forward to be offset against capital gains only, so you do not get an immediate tax benefit from a capital loss unless you have capital gains. This is the downside of a capital loss.

Capital gains for trusts & companies

Obviously, the above only applies to individuals who own rental properties. If you are a trust, super fund or company you have different CGT discount rules.

Also, if the property you owned was purchased before the 1990’s, or was not residential, your cost base is slightly changed.

Speak to an accountant

This information is general only and has been provided by Lucentor Pty Ltd who are accountants that specialise in tax for property investors.

We recommend investors obtain financial advice specific to their situation before making any investment or decision regarding their finances.