Keeping valid and accurate records from the time you purchase your holiday retreat can pay off when it comes to selling the property and calculating CGT.
Owners should not forget to take into account the capital gains that may arise when they eventually sell their holiday house. Since only an individual’s family home or ‘main residence’ is exempt from capital gains tax (CGT), owning other property, such as a holiday house, will put CGT squarely on the table. But there is a way an individual can reduce their capital gain. Where the property was bought after August 20 1991, and used only for private purposes, its cost base can be increased by including expenses, such as interest, rates and taxes.
Capital gains are calculated by subtracting (from the property’s sale price) the cost base plus certain eligible expenses that were incurred as a consequence of owning the property.
If the property is owned for at least 12 months, then 50% of the capital gain is added to the landlord’s taxable income for the year in which they sell the second property. This is taxed at the landlord’s marginal tax rate. When making the CGT liability calculation, some common expenses that may qualify as part of the cost base of the holiday retreat include:
• Legal fees or stamp duty on the purchase
• Sales commissions and legal expenses
• Specific capital improvement costs
• “holding costs”, such as water or council rates
• Mortgage interest
• Repairs, maintenance, gardening and cleaning
Any property additions or improvements can be included in a property’s cost base, but it is always a good idea to seek professional advice regarding this. Owners need to keep in mind that they must keep accurate records throughout their time of ownership, as it is almost impossible to substantiate claims without proper records.
Those who have owned the holiday house since before September 20 1985 do not need to worry about CGT.
If you have any questions regarding CGT, please phone our Newcastle office, Leenane Templeton Chartered Accountants and Business Advisors on 02 4926 2300