Capital gains tax
You may make a capital gain or capital loss when you sell (or otherwise cease to own) a rental property that you acquired after 19 September 1985.
In the case of the sale or other disposal of real estate, the time of the event is normally when you enter into the contract (generally the date on the contract), not when you settle. If there is no contract, the event takes place when the change of ownership occurs. The fact that a contract may be subject to a condition such as finance approval, generally does not affect this date.
You can also make a capital gain or capital loss from certain capital improvements made after 19 September 1985 when you sell or otherwise cease to own a property you acquired before that date.
You will make a capital gain from the sale of your rental property to the extent that the capital proceeds you receive are more than the cost base of the property. You will make a capital loss to the extent that the property’s reduced cost base exceeds those capital proceeds. If you are a co-owner of an investment property, you will make a capital gain or loss in accordance with your interest in the property (see Co-ownership of rental property).
The cost base and reduced cost base of a property includes the amount you paid for it together with certain incidental costs associated with acquiring, holding and disposing of it (for example, legal fees, stamp duty and real estate agent’s commissions). Certain amounts that you have deducted or which you can deduct are excluded from the property’s cost base or reduced cost base. For example, see Cost base adjustments for capital works deductions. From 1 July 2017, travel expenses you incur relating to your residential rental property are also excluded from the property's cost base or reduced cost base.
Your capital gain or capital loss may be disregarded if a rollover applies, for example, if your property was destroyed or compulsorily acquired or you transferred it to your former spouse under a court order following the breakdown of your marriage.
If you were a resident of Norfolk Island on 23 October 2015 you can disregard any capital gain or loss made on a rental property located on Norfolk Island that you held at that time. CGT may however apply to rental properties located on the Australian mainland or elsewhere in the world.
CGT may also apply to any rental properties purchased on or after 24 October 2015. For more information, see:
Record keeping
Keeping adequate records of all expenditure will help you correctly work out the amount of capital gain or capital loss you have made when a CGT event happens. You must keep records relating to your ownership and all the costs of acquiring and disposing of property. It will also help to make sure you do not pay more CGT than is necessary.
You must keep records of everything that affects your capital gains and capital losses. Penalties can apply if you do not keep the records for at least five years after the relevant CGT event. If you use the information from those records in a later tax return, you may have to keep records for longer. If you have applied a net capital loss, you should generally keep your records of the CGT event that resulted in the loss until the end of any period of review for the income year in which the capital loss is fully applied. For more information, see Taxation Determination TD 2007/2 – Income tax: should a taxpayer who has incurred a tax loss or made a net capital loss for an income year retain records relevant to the ascertainment of that loss only for the record retention period prescribed under income tax law?
You must keep records in English (or be readily accessible or translatable into English) that include:
- the date you acquired the asset
- the date you disposed of the asset
- the date you received anything in exchange for the asset
- the parties involved
- any amount that would form part of the cost base of the asset
- whether you have claimed an income tax deduction for an item of expenditure.
- For more information about cost base and record-keeping requirements for capital gains tax purposes, see Guide to capital gains tax 2018.
Depreciating assets
If the sale of your rental property includes depreciating assets, a balancing adjustment event will happen to those assets (see What happens if you no longer hold or use a depreciating asset?).
You should apportion your capital proceeds between the property and the depreciating assets to determine the separate tax consequences for them.
From 1 July 2017, you can make a capital loss (or in some circumstances, capital gain) when you dispose of a depreciating asset to which the new rules about deductions for decline in value second-hand depreciating assets apply. For more information, see Limit on deductions for decline in value of second-hand depreciating assets and What happens if you no longer hold or use a depreciating asset.
General value shifting regime
A loss you make on the sale of a rental property may be reduced under the value shifting rules if, at the time of sale, a continuing right to use the property was held by an associate of yours (for example, a 10-year lease granted to your associate immediately before you enter into a contract of sale). The rules can only apply if the right was originally created on non-commercial terms such that at that time, the market value of the right was greater than what you received for creating it by more than $50,000.
For more information, see Guide to the general value shifting regime.