The five elements
- Money paid to acquire the property: the purchase price.
- Incidental costs: stamp duty, conveyancing and legal fees, buyer's agent fees, building and pest inspections, valuation fees, and on sale the agent's commission, advertising, styling and legal fees.
- Costs of owning it: interest, rates, land tax, insurance and repairs, but only to the extent you could not deduct them, which for a rented property is usually nothing. For vacant land or a property not producing income, they can add up.
- Capital expenditure to increase or preserve its value: renovations, extensions, a new kitchen or bathroom, landscaping that is capital in nature.
- Costs of defending your title: legal costs of a boundary dispute, for example.
What you cannot include
- Anything you have already claimed as a tax deduction.
- Capital works deductions you claimed (they reduce the cost base).
- Your own time spent on renovations.
- Costs reimbursed by insurance or a grant.
Worked example
| Item | Amount |
|---|---|
| Purchase price | $480,000 |
| Stamp duty | $17,000 |
| Conveyancing | $1,500 |
| Kitchen benchtop replacement (capital) | $3,500 |
| Cost base before sale costs | $502,000 |
| Sale price | $640,000 |
| Agent's commission and legal fees on sale | $15,000 |
| Capital gain | $123,000 |
After the 50% discount, the net capital gain is $61,500. Forgetting the stamp duty alone would have added $8,500 to the net capital gain and roughly $3,000 to the tax at a 37% marginal rate.
Contract dates
The CGT event for a property sale happens on the contract date, which decides the financial year and the 12-month test. Settlement dates do not matter for either.
Records
Keep the purchase contract and settlement statement, stamp duty assessment, legal invoices, receipts for every capital improvement, your depreciation schedule, and the sale contract and settlement statement. Keep them for five years after the sale. Without them, you may not be able to prove the cost base if the ATO asks.
Your home
If the property was ever your home, the main residence exemption may cover some or all of the gain, and the cost base rules interact with it (for example the "home first used to produce income" rule resets the cost base to market value). Ask an accountant for anything other than a straightforward investment property.
Repairs or improvements?
The line between a repair and an improvement decides whether a cost is deducted now or added to the cost base. Fixing something to restore it to its original condition (replacing a few broken roof tiles, repainting) is generally a repair, deductible against rent if the property is rented. Replacing an entire structure or improving it beyond its original condition (a new roof of better material, an extension, a renovated kitchen) is capital. Repairs to defects that existed when you bought the property are "initial repairs" and are capital too. Capital improvements may attract capital works deductions, which then reduce the cost base when you sell.
Holding costs for vacant land
Since 1 July 2019, holding costs for vacant land are generally not deductible. Interest, rates, land tax and insurance on vacant land can instead be included in the cost base as third-element costs, which makes record-keeping for the whole holding period worthwhile. Keep annual statements for the loan, council rates and insurance.
Splitting costs
If you own the property with someone else, each owner has their own cost base in proportion to their interest, and the gain is split the same way. Joint costs paid by one owner are generally shared according to ownership, regardless of who paid.
Subdivisions and part sales
If you subdivide a block and sell one lot, the original cost base is split between the lots on a reasonable basis, usually by relative market value at the time of subdivision, and each lot keeps the original acquisition date. Subdivision costs such as surveying and council fees are added to the cost bases of the new lots. Developing and selling lots as a business or a profit-making venture can make the profit ordinary income rather than a capital gain, so get advice before starting a development.