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.