How To Calculate Capital Gains Tax (CGT) On Investment Property (Ep192)

How To Calculate Capital Gains Tax (CGT) On Investment Property (Ep192)


When you sell a property you need to pay capital
gains tax. It’s basically a fact of life if you own a bunch of investment properties and
so today I want to talk about how to calculate capital gains tax on investment property. Hi I am Ryan McLane and I am from onproperty.com.au
your daily dose of property education and inspiration. And I’m going to try and do this
all in one tape today it is something that I’m trying to do to be a bit more broad to
be a more realistic with you guys and obviously like cut back on my editing as well, it’s
taking just so much time. So I do have my handy notebook here which has my notes on
it to help you through it. I know most people listen to the podcast so you guys won’t even
realize that there is no chopping and changing between video. Well for those of you watching
the video I hope that this is still good for you. So calculating capital gains tax a lot of
people think that what you do is you take the price of the property of what you purchase
the property for and then you look at the price of the property and what you sold it
for all and whatever gain you had that’s what you have to pay tax on. But that is not exactly
the case there are some other calculations that you need to take into account before
you try and calculate capitals gains tax. Now I am just going to put out a disclaimer
to say that I’m not a certified tax accountant so none of this should be considered financial
or taxation advice so always go and an account when you actually need to pay capital gains
tax and so they can work it out based on your salary, based on your tax bracket, etc. This
is for educational purposes only. So to calculate capital gains tax I’m going to go through
a bunch of different steps that you can use to get a rough guide of how much capital gains
tax you going to need to pay. So step #1 is to work out what’s for your
cost base. So your cost-based is your purchase price plus other costing like stamp duty.
You’ve got fees for tax advice. You might have other cost like title cost etc. So you
add together all these costs and then what you have to do is then take away from those
costs you going to take away the building depreciation that you claim over the years
and you also have to take away any change in plant and equipment if that’s going down
or you need to add plant and equipment if it is going up. So if the plant and equipment
of your property was worth $100,000 when you moved in (just a rough figure) and it’s now
worth $80,000 well that means you take away the difference which is $20,000. But if you’ve
done a big renovation and now it worth a $120,000 then you need to add $20,000 so depreciation
gets quite confusing. We have done a full series on depreciation a 10-part series go
to www.onproperty.com.au/depreciation and you can learn about that there. But depreciation
does affect capital gains and it affects the cost base of your property. How to work Out Your Capital Proceeds
Step #2 is to work out what’s called the capital proceeds. So this is your sales price but
then you got to take away some of the costs that come with selling a property so things
like your advertising cost,your agent commission your legal expenses and any other expenses
that you may have like auction fees and professional photos and stuff like that. So you are taking
the selling price of the property and then you minus those costs that are associated
with selling that property. Step #3 is you then calculate the difference
between your cost base and your capital proceeds to work out what that figure is so let’s say
your cost base $300,000, your capital proceeds as $500,000, there is $200,000 difference
there. Obviously you need to go through an accountant. Step #4 is to calculate the percentage of
time as an investment property. Now this can get a bit complicated especially if it’s not
just being an investment property if it’s just been your principal place of residence
where you live. In most cases you actually have to pay capital gains tax but if you’ve
been renting it out for the whole time then chances are you are going to have to pay 100%
of the capital gains tax. But and I say but because in the next episode is episode 193
which you can get by going on onproperty.com.au/193. If you have lived in it part of the time and
you have rented it out part of the time then you actually need to do a calculation to work
out what percentage of time that it was actually being used for income-generating purposes
so let’s say you bought it and you rented out for six years and then you lived in it
for six years and so 50% of the time it was income-generating and 50% of the time it was
where you lived well then whatever those proceeds are you actually cut them in half and you
only take 50% of it for the time it was income-generating. I know it gets pretty confusing and I am just
saying this it is pretty confusing. And there is also something if you lived in its first
and then you move out and is still your principal place of residency you can claim some further
extensions but basically that the step to calculate the percentage of time as an investment
property. So this will give you a rough guide. Step #5 is to then take into account any capital
gain tax exemptions that you may have. So there is rollovers during divorce, there is
some small business exemptions and stuff like that which again we are going to talk about
in the next episode so take those into account if you can if not then just ignore step #5. Step #6 is to then work out what tax bracket
you’re in. So depending on how much income you earn you might be paying a small amount
of tax or you might be paying the full percentage of tax. So you need to work out how much tax
that you have to pay. Step #7 assuming no exceptions you do the
following calculations. So in brackets you’ve got sales value minus cost base so basically
what that means is the difference between the sales value and the cost-based is what
we’re looking at so there’s been growth that’s what we’re looking at. You then multiply that
by the percentage of time it’s been an investment property. So if it’s been an investment property
the entire time you multiply by 100% so it stays the same and if it’s been an investment
property half of the time you multiply by 50% so that’s actually a half. You then times
it by your tax bracket, so maybe that’s 30%, maybe that’s 42.5% maybe it’s less whatever
it may be you then times your tax bracket and that’s going to give you a rough estimation
of your capital gains tax that you’re going to need to pay. Now again there are some exemptions
that may be applicable to you it may actually cross over into multiple different tax brackets
so you need to look at the staging of the tax brackets and so just calculating one tax
bracket will obviously give you the wrong result so that’s why it’s important that you
do see a professional when you do this and this can’t be taken as taxation advice. I have actually written down here I don’t
know if you can see it. I wrote step #8 is to never do this yourself. Always get an accountant.
And really I say that to cover my own ass in a way because I am not qualified to say
what you should do in your circumstance but I can talk generally on this topic and I can’t
help you do this and how to calculate your capital gains tax. So I hope that has been helpful to you. If
you want calculator that can help you analyze potential investment property that you haven’t
purchased yet and see what the cash flow is going to be like well I have actually created
some and they are available inside On Property Plus which is my premium membership website.
It’s really cool it�s in just 3 steps so you just put in purchase price, rental income
and you put in the percentage of interest you are going to be paying so it’s 3 steps
and it takes under 10 seconds and it gives you a rough estimation on whether it’s going
to be positive cash flow or negatively geared and by how much. It is really a great tool
to use if you are looking in a lot of properties online to estimate if I was to purchase this
property how would it deliver for me. You can check that out and everything else that’s
in On Property Plus by going www.onproperty.com.au/plus. And the next episode, episode 193 we’re going
to be talking about how to avoid capital gains tax on investment property. But if you are
on the show now and you want to see stuff written down because it probably will make
more sense written down go to www.onproperty.com.au/192 for today’s episode. So until tomorrow remember
that your long-term success is only achieved one day at a time. I am Ryan McLane and I’ll
see you guys tomorrow at 8:00pm.

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