Only the family home is exempt from capital gains tax, so owning a property other than your ‘main residence’ (such as a holiday house) is rightly assumed to put capital gains tax (CGT) squarely on the table for all your tax equations.
Although you may never rent out your beach shack or bush retreat (viewing these as lifestyle assets instead of investments), tax-wise these properties will still be subject to the CGT provisions upon disposal.
This of course means that you will be expected to pay CGT if you make a gain on the sale of your second property as it is not your main residence. However the cost base of the asset can be increased by including expenses such as interest and rates and taxes (provided the property was acquired after August 20, 1991) which will lead to a reduced capital gain. Keeping accurate and valid records from the time you buy your weekender is essential.
The CGT liability is calculated by subtracting, from the sale price, the cost base plus any eligible expenses built up over the time you have owned the property. Where it has been owned for at least 12 months, 50% of the capital gain is added to your taxable income for the year in which you are selling the second property, to be taxed at your marginal tax rate.
Expenses that qualify to be added to the cost base of your holiday house include:
• legal fees and stamp duty on the purchase
• selling costs such as sales commissions and legal expenses, and
• capital improvement costs incurred along the way.
There is even scope to include:
• ‘holding’ costs, such as water or council rates
• mortgage interest, and
• running costs such as repairs, maintenance, gardening and cleaning.
Note: It must be emphasised that expenses can only be added to the cost base if the property was acquired after August 20, 1991.
Any additions or improvements could be added to your cost base, but as always it is better to get professional advice at the time. Again, make sure you keep accurate records all along the way, as without proper records it is nigh impossible to substantiate your claims if you are asked.
If you have owned the holiday house since before September 20 1985, there’ll be no CGT to worry about.
If you rent out your second property at any time, you will be able to claim some expenses incurred during the rental period as tax deductions, however expenses which are deductible cannot be added to the cost base for CGT purposes.
|Holiday house acquisition date and CGT cost base claims|
|Bought before 20 Sep 1985||Bought between 20 Sep 1985 and 20 Aug 1991||Bought after 20 Aug 1991|
|No CGT applies, therefore no need to account for expenses.||Must account for capital gains, but no deduction expenses.||Cost base plus eligible expenses able to be deducted from capital gain.|