Holding costs and the impact on Capital Gains Tax


Holding costs are expenses associated with the continuing ownership of an asset like real estate or share investments. These costs help to reduce the amount of any taxable capital gain when the asset is eventually sold.

Examples of expenses that may be considered as holding costs include:

  • Council rates
  • Interest on loans used to finance the investment
  • Insurance
  • Land tax
  • Repairs & Maintenance

But holding costs do not include costs previously claimed as a tax deduction. So if you have a rental property and normally claim council rates as a tax deduction against rental income, the rates cannot form part of the cost base. However if you incur council rates on vacant land, you are not entitled to a tax deduction and could therefore record these as holding costs.

Importantly, to be eligible to add holding costs to the cost base of a CGT asset, the asset must have been acquired after the 21st of August 1991.

The concept of holding costs and their significant effects can be better understood through an example.

Mr and Mrs Smith purchased a holiday home in Margaret River on 1 July 2012 for $500,000. The property is considered a CGT asset as their main residence exemption is being utilised on a separate property in Perth. The holiday home was sold on 30 June 2017 for $800,000 which would ordinarily result in a $300,000 capital gain.

Mr and Mrs Smith incurred the following holding costs over the 5 years of ownership.

  • Insurance $10,000
  • Council Rates $15,000
  • Interest $75,000

As the residence was a holiday home (Purchased after 21 August 1991) and a deduction was not allowed during the time of ownership, these costs are eligible to be included in the cost base of the property. Therefore, the cost base will increase to $600,000 and the capital gain will reduce to $200,000.

Pro tips:

  • holding costs cannot be used to increase a capital loss
  • ensure that records of these costs are kept in the form of receipts, bank statements etc.

Other related blogs:

Capital Gains Tax and Building a House
Capital Gains Tax – Main Residence Series: Rent out your House
CGT Main Residence Exemption and Moving Overseas
Subdividing you main residence and selling the ‘backyard’

 

Author: Georgia Burgess
Email: georgia@faj.com.au