Capital Gains Tax (CGT) results in the sale of an investment when you sell that item for an amount higher than the original purchase cost. However, with rental properties this simple approach is not completely accurate.
With rental properties you may be able to claim depreciation on plant and equipment and Special Building Write-Off. This will always apply to new residential premises. The consequence of this deduction results in a greater yearly deduction. However, it also reduces the cost base.
For example, say we have a total cost of property of $500,000 of which $230,000 is for the land and $270,000 is for the building.
Assumptions:
- Depreciation and Special Building Write-Off per year is $5,000;
- Property is rented and available for rent for 10 years;
- Property sold, after selling costs and charges, for $480,000.
Calculation:
(a) Total initial cost: $500,000
(b) Depreciation and Special Building Write-Off
claimed over 10 years: $50,000
(c) Reduced cost base: (a)-(b) = $450,000
(d) Sale proceeds (after selling costs): $480,000
(e) Capital Gain: (d)-(e) = $30,000
(f) Taxable gain (reduced by 50%): $15,000
This example demonstrates the unexpected result of a Capital Gain.
If you believe that you are in a similar scenario and need assistance, please contact our office for further information.
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