Rental Properties – Tips for managing capital gains

1. Include all the elements of the cost base

A capital gain is the difference between the capital proceeds (sale price) and the cost base (purchase price plus capital costs). Basically, the higher your cost base, the lower your capital gain.

So make sure you include all the elements of the cost base, including:

  • Purchase costs such as stamp duty, legal fees, conveyancing, and building inspections;
  • Sale costs such the agent’s fees, advertising and legal fees relating to the sale or title transfer;
  • Capital works such as building works, renovations and extensions. (This excludes depreciating assets as different rules apply to these.)

2. Sort out your paperwork from day one

If you don’t have the paperwork to prove you incurred a capital expense you cannot include it in your CGT calculation. Missing paperwork can mean a bigger capital gain and extra tax. So keeping good records is critical.

This can be a problem with an investment property that is held for several years, or even decades. However, if your tax agent creates a CGT Asset Register for your property you don’t need to worry about keeping paperwork.

In addition, having a clear record of your cost base allows better tax planning when you sell the property.

3. Use contract date

The date of sale for the purposes of CGT is the contract date not the settlement date. If a property is sold in June 2011 and settled in August it is taxed in the 2010-11 tax year.

4. Reduce your other income to offset a capital gain

If you have a large capital gain to include in your next tax return here are some steps to improve your position:

  • Salary sacrifice into superannuation (employees)
  • Make a lump sum deductible super contribution (self-employed)
  • Pre-pay expenses e.g. interest on an investment loan, insurance premiums
  • Dispose of other CGT assets (e.g. shares) that are in a loss position.
  • Lodge your return later in the lodgment cycle (i.e. 15 May) to keep hold of the money for longer. This is particularly important if your cash flow is tight.