One of the fundamental factors of a holiday home sale is CGT. Do not forget to factor in the capital gains that may arise when the time comes to sell. Only your family home or main residence is exempt from CGT. As such you will inevitably find yourself and CGT eyeballing each other when you purchase a holiday abode. Before you consider sticking with booking a room in resorts instead though, rest assured there is a way to reduce your capital gain.
- Buy your holiday home after 20 August 1991?; and
- Used your holiday home for private purposes only?
If so, you can increase your asset’s cost base by including expenses like interest, taxes and rates.
Here is how capital gains work. These are calculated by taking the property’s sale price then deducting the cost base together with specific eligible expenses that were incurred as a result of the property ownership.
If you have owned your holiday home for at least 12 months, 50 per cent of the capital gain is lobbed onto your taxable income for the year in which you sell the second property. This is taxed at your marginal tax rate.
Now when you are making your CGT liability calculation, there are several basic expenses that may qualify as part of your holiday retreat cost base. These include:
- Legal fees or stamp duty on the purchase
- Sales commissions and legal expenses
- Specific capital improvements costs
- ‘Holding costs’ like water or council rates
- Mortgage interest
- Repairs and maintenance
- Gardening and cleaning
You can also include in your holiday property’s base cost any additions or improvements that you’ve made. Should you want to do this though, it is highly advisable to enlist the advice and guidance of a professional. Remember that you may be called upon to substantiate your claims. So full accurate records from the time you take ownership is vital.
If you and your holiday home have been together since before 20 September 1985, CGT is not something you need to worry about.