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Investment Property Capital Gains Tax (CGT) Calculation with PPR Transition

by | Feb 28, 2025 | Capital Gains, Principal Place of Residence, Property, Property Investors, Property Taxation, Rental Properties, Uncategorized

Having an investment property prior or posted to it being a principal place of residence has tricky CGT Calculations.

Capital Gains Tax (CGT) is an essential consideration for property owners when selling a property used for different purposes over time. This blog outlines the CGT implications of transitioning a property from a rental investment to a Principal Place of Residence (PPR) before being sold.

We will explore how CGT is calculated, the impact of third-element cost base adjustments, and the application of the 50% CGT discount.

Step 1: Property Purchase & Initial Cost Base

Date Purchased: 1 July 2015
🏠 Purchase Price: $500,000
📑 Stamp Duty & Legal Fees: $25,000
🛠 Capital Improvements: $50,000
💰 Total Initial Cost Base: $575,000

Step 2: Rental Period

Property Rented From: 1 July 2015 – 30 June 2020
📆 Rental Duration: 5 years (60 months)

Step 3: Transition to Principal Place of Residence (PPR)

🏡 Owner Moved In: 1 July 2020
📆 PPR Duration: 4 years, 1 month (49 months)
💡 Holding Costs (Non-Deductible but Added to Cost Base):

  • Mortgage Interest
  • Council Rates
  • Insurance Premiums
  • Maintenance Costs
    ⚠ No Market Substitution Rule Applies → Since the transition was from rental to PPR, the market value rule does not apply (ATO Reference). However, had the property changed from PPR to rental, the market value at the transition date would have become the new cost base (ATO Reference).

Step 4: Property Sale & Capital Gain Calculation

💰 Date Sold: 1 August 2024
💵 Selling Price: $900,000
📑 Selling Costs (Agent Fees, Legal, etc.): $25,000
💰 Net Sale Price: $875,000
📈 Initial Capital Gain Calculation:

  • $875,000 – $575,000 = $300,000

Step 5: Adjusting the Cost Base (Third-Element Costs)

🛠 Holding Costs During PPR (Non-Deductible but Included in Cost Base): ✅ Mortgage Interest, Council Rates, Insurance, Maintenance = $105,000 (ATO Reference)
💰 New Adjusted Cost Base: $680,000
📈 Revised Capital Gain:

  • $875,000 – $680,000 = $195,000

Step 6: Determine Taxable CGT Portion

Total Ownership: 9 years, 1 month (109 months)
📆 Investment Use Period: 5 years (60 months) → 55% Taxable
💰 Taxable Capital Gain:

  • 55% × $195,000 = $107,250

Step 7: Applying the 50% CGT Discount

📉 Discounted Gain (Held >12 Months):

Step 8: Tax Calculation (2024–25 Tax Rates)

According to the ATO, the individual income tax rates for Australian residents for the 2024–25 financial year are:

  • $0 – $18,200: Nil
  • $18,201 – $45,000: 16c for each $1 over $18,200
  • $45,001 – $135,000: $4,288 plus 30c for each $1 over $45,000
  • $135,001 – $190,000: $31,288 plus 37c for each $1 over $135,000
  • $190,001 and over: $51,638 plus 45c for each $1 over $190,000

Note: These rates exclude the Medicare levy of 2%.

Tax on $80,000 Salary

  • First $18,200 @ 0%: $0
  • $18,201 – $45,000 @ 16%: $26,799 × 16% = $4,287.84
  • $45,001 – $80,000 @ 30%: $34,999 × 30% = $10,499.70
  • Total Tax on $80,000: $4,287.84 + $10,499.70 = $14,787.54

Tax on $133,625 (Salary + Discounted Capital Gain)

  • First $80,000: $14,787.54
  • $80,001 – $133,625 @ 30%: $53,624 × 30% = $16,087.20
  • Total Tax on $133,625: $14,787.54 + $16,087.20 = $30,874.74

Additional Tax Due to CGT:

30,874.74 (Total Tax on $133,625) – $14,787.54 (Total Tax on $80,000) = $16,087.20

Final Tax Payable on Capital Gain: $16,087

🎉 Significant CGT Savings Achieved! 🚀

Step 9: Additional CGT Reduction Strategies

  • Superannuation Contributions: Making additional super contributions can reduce your taxable income.
  • Applying Prior Capital Losses: Offsetting capital gains with prior capital losses can reduce your CGT liability

Conclusion

Capital Gains Tax calculations can be highly complex, particularly for properties transitioning between rental and personal use.

Misinterpreting eligibility for exemptions, miscalculating cost base adjustments, or overlooking deductible holding costs can result in unexpected tax liabilities.

Given the intricacies involved, it is easy to make errors that could lead to overpayment or non-compliance. To ensure accurate calculations and take full advantage of available tax concessions, seeking professional tax advice is strongly recommended.

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