Aero Tax Tips: Capital Gains Tax (CGT) – Increased Cost Base

Unlock the Secret to Reducing Property Capital Gains Taxes: Maximize Benefits with an Increased Cost Base!

In order to calculate your capital gain for tax purposes, the Australian Tax Office (ATO) requires a valuation of your investment property. This valuation establishes the cost base used in the calculation.

Having a property valuation for capital gains tax purposes is required by the ATO. However, it can also benefit you as an investor by increasing your cost base, which can result in a lower reported capital gain.

Making Sense of Capital Gains Tax and Property Valuation you must navigate capital gains tax and property valuation, which can be difficult due to the amount of property jargon involved. 

To fully comprehend how we can benefit from this, let’s revisit what Capital Gain Tax is and explore methods to increase our cost base.

A Comprehensive Guide to Capital Gains Tax on Property Sales

If you’re planning to sell an investment property, it’s crucial to comprehend the basics of capital gains tax. Keep in mind that any earnings from the sale of an investment property are considered capital gains and must be reported on your income tax return. The tax paid on capital gains is known as capital gains tax (CGT).

Exemptions from Capital Gains Tax

The Australian Taxation Office (ATO) offers exemptions and concessions for property investors, which can help them avoid or significantly reduce their capital gains tax liability. These exemptions include:

  • The Principal Place of Residence (PPOR) exemption
  • The Capital Gains Tax Property 6-Year Rule
  • The Six-Month Rule
  • The 50% Discount (if the property has been owned for at least 12 months before selling)


Understanding a Property’s Cost Base

To calculate a capital gain, simply deduct the property’s cost base from the selling price. The cost base comprises the purchase price and expenses, excluding grants and depreciation:

cost base = purchase price + expenses (itemized below) – (grants + depreciation)

By including expenses in your cost base, you can decrease the capital gains you report on your yearly tax return.

Expenses Based on Cost

Here are the key cost-based expenses that you should be aware of:

  • Incidental Costs: This includes expenses such as legal fees, stamp duty, and rental advertisement fees.
  • Ownership Costs: These expenses are incurred during the property search and inspection process.
  • Title Costs: These expenses are incurred when registering your property’s title with the Land Titles Office in your state or territory.
  • Improvement Costs: This includes the expenses involved in renovating and repairing your property.


Understanding Retrospective Capital Gains Tax Property Valuations: Definition, Purpose, and Process

A retrospective capital gains tax property valuation is a process of assessing the value of a property at a specific point in the past to calculate the potential capital gains tax liabilities. This type of valuation is typically required when the original sale agreement price was incorrect or when there are no records of renovation costs that could significantly impact the current valuation figures. The purpose of this process is to provide a fair and accurate estimate of the property’s value at the time it was acquired or improved, which is essential in determining the appropriate tax liabilities.

To summarize, the article discusses the importance of property valuation for capital gains tax purposes in Australia, with a focus on understanding the cost base and expenses that can be included to decrease capital gains tax and exemptions that may be available to property investors. The article also covers retrospective capital gains tax property valuations, which are used to assess the value of a property at a specific point in the past to determine potential tax liabilities.

Navigating capital gains tax and property valuation can be a daunting task, but understanding the basics is crucial for any property investor. Remember that a property valuation report for capital gains tax purposes is mandatory, but it can also benefit you by increasing your cost base, leading to a lower reported capital gain. 

At Aero Accounting Group, we specialize in providing comprehensive guidance on CGT options and work with registered property valuers to help you navigate this process with ease. Contact us today to learn more about how we can assist you in reducing your capital gains tax liability.

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