If you are in the business of selling investment properties, then you should be familiar with the process of paying CGT or Capital Gains Tax. Those who own several investment properties are familiar with this, and today, we will be sharing with you how you can calculate the Capital Gains Tax on a property. 

Most people think that all they need to do is take the purchase price of the property (e.g., the purchase price) less the amount they were able to sell it for (e.g., the selling price), and whatever gain they have on the sale is the taxable amount. However, this is not necessarily the case. There is a procedure that you must follow. Otherwise, you will come up with the wrong digits. 

You must take various calculations into account before the Capital Gains Tax is calculated. Today, we will be going through the different steps you can use to determine the correct amount of Capital Gains Tax you have to pay on a specific investment property. 

How To Compute Capital Gains Tax

Step No. 1: Work Out Your ‘Cost Base’

The first step is to come up with the "cost base." To do this, you must identify your purchase price and add other related costs to the purchase like stamp duties, costs for transfer or registering of title, Lawyer fees, fees for tax advice, etc. 

Then, remove the depreciation cost over the years and the changes in the value of your PPE or Property, Plant, and Equipment. For instance:

If the PPE of your property is worth $100,000 upon purchase, and after a few years, it is now worth $70,000, then that means the $30,000 difference is what you would deduct from the "cost base." However, if you made a massive renovation and your property worth $100,000 upon purchase is not worth $130,000, then you will add the $30,000 difference to your "cost base." 

Learning about depreciation can be confusing, so make sure to check other resources that can help supplement your knowledge on this topic and help you understand it better. Remember:

Cost Base = Purchase Price - Purchasing Costs (additional costs incurred during the purchase) - Depreciation - (Purchase Price if Property, Plant and Equipment [PPE] - PPE value during the conduct of the sale)

Step No. 2: Work Out Your ‘Capital Proceeds’

The next step is to work out your capital proceeds. It is the value of your sales price once some costs that come with selling a property have been deducted. It includes advertising costs, legal expenses, commissions to agents, auction fees, and other related costs. 

Of course, it would still be better to consult a certified accountant since tax laws are subject to change. To sum it up:

Capital proceeds = Selling Price - Selling Costs (costs related to selling your property)

Step No. 3: Calculate the Difference Between Cost Base and Capital Proceeds

The next step is to calculate the difference between the cost base and the capital proceeds. For instance:

Your cost base is $300,000, and the capital proceeds amounted to $500,000. The difference between the two ($200,000) is your capital growth.

Remember: Capital Proceeds - Cost Base = Capital Growth

Step No. 4: Calculate the Percentage of Time as An Investment Property

This step may get a bit complicated, especially if your asset has not just been an investment property. 

• 100% Principal Place of Residence (PPR)

If it has just been your PPR and you live there, then in most cases, you do not have to pay Capital Gains Tax.

• 100% Investment Property

If you have been renting the place out for the whole time being, then chances are, you must pay 100% of the Capital Gains Tax applicable. However, if you have held the property for more than 12 months, you may be eligible for a 50% Capital Gains exemption.

• Part Investment Property, part PPR

Suppose you have lived in the property for a while and have rented it out another time. In that case, you may need to develop a computation to determine the percentage of time you used the property for income-generating activities. For instance:

You bought a property, rented it out for five years, and lived on it for another five years. 50% of the time, it was income-generating, and the other 50%, it was not whatever your proceeds must be divided by half as you must only pay the Capital Gains Tax on 50% of the capital growth.

Remember: Capital Growth x Time as Investment (%) = Taxable Capital Growth (unless some exemptions are applicable)

Step No. 5: Calculate Your Capital Gains Exemptions

The 5th step is to consider some of the exemptions that may be applicable in your case. If there are none, then proceed to the next step. 

Remember Original Taxable Capital Growth – Exemptions = Actual Taxable Capital Growth.

Step No. 6: Multiply by Your Tax Bracket as A Percentage (Sliding Scale)

The next step is determining what tax bracket you belong to and selecting your tax rate from there. 

Remember that:

Actual Taxable Capital Growth X Tax Bracket % (Sliding Scale) = Payable Capital Gains Tax.

Step #7: Hire an Accountant

That is right - if you cannot seem to understand it, the best option is to hire an expert in the field. Accountants can compute your taxes in a short time (provided that your documentations are complete and accurate), and they can do it with little to no mistakes at all. 

If in doubt, do not think twice and contact your trusted and licensed Accountant right away. You will surely be thankful that you did! Just make sure that you will hire an Accountant from a trusted company or someone you know to be a licensed expert since you will be giving them access to your files. 

Takeaway

Calculating the capital gain can be cumbersome, but it will significantly help you plan your investments so you can gain the most return and avoid incurring possible losses.