What expenses are deductible when selling a rental property

How CGT applies to your rental property and what expenses you can include in your costs.

On this page

• How capital gains or losses apply
• Working out your costs
• Capital expenses
• Depreciating assets
• GST on rental properties
• Foreign resident capital gains withholding

How capital gains or losses apply

When you sell or dispose of a rental property you may make a capital gain or loss.

A capital gain or loss is the difference between what it cost you to obtain and improve the property (the cost base) and the amount you receive when you dispose of it.

If you make a:

• net capital gain in an income year, you'll generally be liable for capital gains tax (CGT)
• net capital loss, you can carry it forward and deduct it from your capital gains in later years.

Use our calculator or steps to calculate your CGT.

To see how to enter your capital gains or losses when completing your tax return in myTax, watch our video on How to complete myTax when you have sold a rental propertyExternal Link.

You may be entitled to a part or full main residence exemption if you:

• lived in the property before renting it out (see Treating former home as main residence)
• rented out part of your home.

If you are a co-owner of the property, you'll make a capital gain or loss in accordance with your ownership interest in the property.

The application of a capital gain or loss depends on when you acquired the property:

• If you acquired the property before 20 September 1985 then it will only apply to certain capital improvements made after that date.
• If you acquired the property after 20 September 1985, then it will apply to the entire property.

Watch: Selling your rental property

Watch: Selling a rental property that was your home

Working out your costs

The cost base and reduced cost base of a property include the amount you paid for it together with some incidental costs associated with acquiring, holding and disposing of it (such as legal fees, stamp duty and real estate agent’s commissions).

It does not include amounts that you have claimed or plan to claim as a tax deduction.

When you sell your rental property, the time of the event (the time at which you make a capital gain or loss) is when you enter into the contract, not when you settle.

Example: capital gains on the sale of a co-owned rental property

Karl and Louisa bought a residential rental property in November 2016 for a purchase price of $750,000. This included depreciating assets worth $12,000.

They incur costs of purchase, including stamp duty and legal fees, of $30,000.

After purchase they improved the property by constructing a fence for $6,000.

Over the 5 years of ownership of the property, they claimed $5,000 in decline in value deductions and $35,000 in capital works deductions. (If they had purchased the property after 9 May 2017 then there would be no deductions for the decline in value of any second-hand depreciating assets.)

In June 2021, they entered into a contract to sell the property, and in November 2021 it was sold for $900,000. Their costs of sale, including legal fees, were $10,000. The depreciating assets were then worth $7,500.

A + B + C + D − E - F = Cost base

Where:

• A is the purchase price
• B is the costs of the purchase
• C is the cost of property improvements
• D is the legal fees
• E is the capital works deductions
• F is the cost of the depreciating assets acquired with the property (the gain or loss on the depreciating assets needs to be calculated separately to the capital gain or loss).

$750,000 + $30,000 + $6,000 + $10,000 − $35,000 − $12,000 = $749,000

The capital gains outcomes are:

Proceeds = total proceeds − value of the depreciating assets

$900,000 - $7,500 = $892,500

Proceeds − Cost base = Capital gain outcome

$892,500 − $749,000 = $143,500

As the property has been owned for more than a year, the discount capital gain rules reduce the capital gain to $71,750.

Karl and Louisa owned the property jointly. This means that they each have a capital gain of $35,875 which they will need to put in their tax return for the year in which the contract to sell the property was made, being the 2020–21 year.

They will also need to calculate balancing adjustments for the depreciating assets. (The calculations are different for second hand depreciating assets in properties purchased after 9 May 2017.)

End of example

For more information on working out your costs, see Rental properties.

For more information on working out your balancing adjustments, see Depreciating assets.

Capital expenses

Expenses you incur when purchasing, acquiring, selling, or disposing of your rental property are capital expenses. You may be able to include capital expenses when calculating the 'cost base' of your property. This can help you reduce the amount of CGT you pay when you sell your property.

Capital expenses include:

• conveyancing costs paid to a conveyancer or solicitor
• title search fees
• valuation fees (when it is a private valuation conducted by your solicitor)
• stamp duty on the transfer of the property.

Example: capital expenses

Stephen recently purchased a rental property that needed repairs before the tenants moved in. He paid tradespeople to:

• repaint dirty walls
• replace broken light fittings
• repair doors on 2 bedrooms.

The house was also treated for damage by white ants.

Because Stephen incurred these expenses to make the property suitable for rent (not while he was using the property to generate rental income), these expenses are capital expenses and are added to the cost base of the property.

End of example

Depreciating assets

If the sale of your rental property includes depreciating assets, you’ll need to apportion your capital proceeds and cost base between the property and the depreciating assets.

When you sell a depreciating asset, a ‘balancing adjustment event’ occurs. This means you need to calculate a balancing adjustment amount to include in your assessable income or to claim as a deduction.

Watch: Claiming depreciating assets

For more information, see:

• Depreciating assets and CGT
• Guide to depreciating assets
• Limit on a deduction for the decline in value of second-hand depreciating assets

GST on rental properties

Generally, the sale of existing residential premises is input taxed. This means:

• you cannot claim GST credits on any costs associated with buying or selling
• GST does not apply to the rental payments you receive.

However, if you build new residential premises for sale, you may:

• be liable for GST on the sale (at settlement)
• need to register for GST depending on your turnover.

If you do need to register for GST, you may also be entitled to GST credits on construction and sale costs, even if the premises have been rented for a period before being sold.

For more information, see:

• GST and residential property
• Building and construction – residential premises

Foreign resident capital gains withholding

Foreign resident capital gains withholding (FRCGW) applies when selling your rental property where the contract price is $750,000 or more.

The FRCGW tax rate is 12.5%.

A clearance certificate application form should be completed and lodged by Australian resident sellers who don't wish to have amounts withheld by purchasers.

For more information on FRCGW, see Capital gains withholding: Impacts on foreign and Australian residents.

How CGT applies to your rental property and what expenses you can include in your costs.