So you’ve decided to sell your rental property.
One thing’s for sure…. you’ll need to work out if you’ve made a capital gain or a capital
loss. But what does that mean?
Well, a capital gain is when you sell the property for more than it cost you.
A capital loss on the other hand is when you sell the property for less than it cost you. But what’s the cost of a property? Well, it’s
the amount you paid for it plus certain costs associated with buying, holding and selling
it; such as legal fees, stamp duty, and selling agent’s commission.
Some amounts are excluded from the property’s cost; for example deductions you’ve already
claimed for building costs. Phil just reminded me – you can generally
reduce your capital gain by 50% if you’ve owned the property for 12 months. Yes, but it’s the sale contract dates that
are usually critical, not the settlement dates. So make sure there’s at least 12 months between
the two contract dates. Oh, and the contract date also determines
the year I declare the capital gain in my tax return. When you sell your rental property you’ll
need to reasonably divide up the sale price between the property and any depreciating
assets in the property. This is because there are separate tax consequences for each.
So let’s see how Phil and Sarah did on their investment. After taking away the depreciating assets,
the house and land cost us 500 thousand and we sold it for 760 thousand. It was rented out for the whole 10 years that
we’ve had it. And we’ve kept records from the start so it was easy to work out the costs.
Apart from the cost of the property, there were solicitor fees, stamp duty and initial
repairs. We also built a carport. And then there were the sale costs — like marketing
and estate agent’s commission. And after deducting building costs, that all came to 60 thousand. So, your sale proceeds were 760 thousand,
less your costs of 560 thousand — which is the initial price of the house and land plus
other costs. And that left you with a capital gain of 200 thousand. Not a bad investment? That’s right. And because we owned the property
equally, that came to 100 thousand each. And don’t forget the 50% discount! So we were
able to halve our capital gain even further to 50 thousand each. One more thing. If the rental property was
your main residence for part of the time you owned it, or if it was your main residence
and you rented out a part of it, you may be entitled to a partial exemption from capital
gains tax. We’ll look at that in the next video in our
series. If you’d like to find out more and to watch
other videos in the series go to ato.gov.au/rental.