What Is Tax Deductible When I Sell a House?

If you’re selling your home, the good news is that there’s no Capital Gains Tax (CGT) to pay on any profit you make. Against that, however, none of the expenses you incur is tax deductible, and at least it keeps the transaction relatively straightforward in tax terms.

The same doesn’t apply when selling a house bought as an investment property. This can include a property that is your main residence but where part of it is rented, generates rental income, and is therefore classified as a rental property.

A tax deduction may be allowed if it’s a residential rental property for a period before it became your main residence or if you have rented it out after living there. In these cases, CGT will only apply to the part of the property for the period when it was rented but not when used as your main residence.

Your Capital Gains Tax (CGT)

To know about your investment property tax deductions, you need to know first about CGT. This will also help you learn more about tax deductions you can claim and pay capital gains tax, whether for your rental property or investment.

Your capital expenses are what you pay on profits when you sell a property. CGT applies to assets acquired after 20 September 1985. As a property owner, you’re expected to report your capital gains or profits and capital losses in your income tax. Then, you pay tax on your capital gains at your income tax rate. 

One thing to remember is that this is not a separate tax. Capital gains are included in the income tax and can increase the tax amount you need to pay. Also, it can also increase your assessable income, putting you in a different tax bracket. 

Determining tax deductions & the amount of tax payable

Suppose you sell a house used as an investment property. In that case, Capital Gains Tax will be calculated on the difference between the sales price and the cost price, with allowable expenses deducted from the sale price and added to the cost. 

The cost base will be the price paid for the property plus any allowable capital expenses, which include:

• any legal expenses paid to a solicitor, such as title search fees, chargeable appraisal costs and conveyancing costs for the transfer of ownership of the property
• fees paid to a real estate agent or property manager
• stamp duty payable on the acquisition of the property.

Some of these costs will apply when buying and selling the property, so both can be used to reduce the amount of Capital Gains Tax due. If a loss results after considering the buying and selling values and the allowable tax deductions, this can be offset against other capital gains to reduce your overall capital expenses. 

Other expenses during ownership may apply for investment properties, though these are deducted against tax each financial year rather than on selling the property. They include:

• the costs of maintaining and repairing the property
• local council rates and water rates
• interest on any mortgage or loan taken out in connection with the investment property
• building, contents and landlord insurance
• advertising and property management fees
• adviser and accountant fees.

Any renovation and refurbishment work may be classified as capital costs and may need to be apportioned over several years. And, as before, if only part of the investment property is for rental or this occurs for only part of a year, the costs need to be apportioned appropriately.

Related: Who Pays Stamp Duty When Selling Property?

What is considered main residence?

Your main residence is your home and is determined by several factors set by the Australian Tax Office (ATO): 

• You live there
• Your personal belongings are in the home
• It is your mail address
• It is your electoral address
• It is connected to utilities and services
• You live there.

There is no specific time you need to live in the house before it can be considered the main residence. As long as those listed above apply, the home is your main residence. 

You can only have one main residence, but you will be entitled to an overlap period of six months when you sell the old property and buy another. 

Related: How much does it cost to sell a house?

Capital Gains Tax exemptions

There are several capital gains tax exemptions you need to know: 

• When the property is on a large block, the exemption will apply to the house and land up to two hectares. 
• When the main residence includes a dwelling, such as a cottage, flat, strata title unit, a unit in a retirement village, a caravan, houseboat or other types of mobile homes. 
• When you can no longer live in the dwelling due to the loss of ability to live independently and need full-time care. 

Remember that property investors are not exempted from Capital Gains Tax when they own land, even if they plan to build a dwelling on it eventually. On the other hand, you can treat land as your main residence for up to four years before a dwelling is constructed. 

Reducing CGT when selling a property

When you have owned the property for at least 12 months before you sell it and you are a resident in Australia, you may be eligible for a 50 per cent discount on your capital gains. This is also referred to as the CGT discount.

However, there are exemptions to this. For one, if you have used it as a rental property or business less than 12 months before you sell it, you are not eligible for the discount. You can check out the ATO website to learn more about claim deductions.

Negative gearing and its impact on your taxes

What is labelled as negatively geared in the world of property taxes and tax deductions? Negative gearing is when the money you get from your investment property is less than your mortgage repayments and other expenses. 

If negative gearing applies, you can deduct losses and claim depreciation from your taxable income. In turn, this gets you a tax deduction.

Some investment property owners hold on to negatively geared properties to profit from the property’s capital growth the moment they sell. This leads to capital improvements because the tax benefits from negative gearing let investors limit their losses until they’re ready to sell. 

Can you claim agent fees when selling investment property?

When purchasing an investment property, the buyers’ agent fees are not considered claimable when purchasing an investment property. This means you cannot claim property management on your taxable income for the year that you purchase the property. 

One thing to remember is that whilst buyers’ agent fees can’t be claimed right away, they can be included in the calculation of the cost base of your investment property. The cost base is the amount you paid to buy and maintain the property without the claimed expenses. This will also be used to calculate capital gains tax on any capital growth you attain from your property. 

That said, buyers’ agent’s fees will be added to your tax calculations. The fees will reduce the profit amount from the sale you need to pay tax on. This may lead to a significant amount of savings. 

And even if you sell the property for a loss, the buyers’ agent fees will still be added to your tax calculations. This will increase the amount of capital loss on the property that can be used to offset capital gains in the future. 

Remember that this will only apply to buyers’ agent fees for an investment property purchase. 

Getting the best tax advice

Taxation and tax deductibles can be complicated subjects, so you need professional advice to ensure you minimise costs. A good real estate agent can help you determine your tax benefit and the deductions you can claim.

At LocalAgentFinder, we have thousands of real estate agents on our comparison tool so that you can select the most suitable one. Speak to several before making your choice so you can be sure you have the right one for your needs. They’ll ensure you sell your property quickly, for the best price and with minimal cost, including tax payable.