Rise High Investor Weekly Video #51 – What is cost base and why is it important



What is Cost Base?

Think of your cost base as the foundation for calculating the profit or loss when you sell your property. It represents the total investment you’ve made over time, and your accountant will use it to determine how much capital gains tax you’ll owe. It’s a key piece of the puzzle when it comes to understanding your financial outcomes.

Components of Cost Base

Here are the main elements that build your cost base:

  • Purchase Price: This is the price you paid for your property when you first bought it.
  • Incidental Costs: Expenses like stamp duty, conveyancing fees, and other costs tied to acquiring the property.
  • Initial Repairs and Maintenance: Any repairs or maintenance you carried out in the first 12 months that weren’t deductible right away.

How Cost Base Changes Over Time

Understanding these adjustments helps you plan more effectively for the future.

  • Depreciation Reductions: Any building depreciation you’ve claimed over the years lowers your cost base.
  • Plant and Equipment Adjustments: Changes in the value of items like appliances and fixtures between the purchase and sale dates are factored in.

Why is Cost Base Important?

Knowing your property’s cost base gives you clarity and control over your financial decisions. Here’s why it matters:

  • Simplifies Capital Gains Tax: Your cost base determines how much tax you’ll need to pay when you sell.
  • Prevents Surprises: By understanding your cost base, you can avoid unpleasant surprises like unexpected tax bills.

Avoiding Common Pitfalls

Selling a property without fully understanding your cost base can lead to challenges. Here’s how to avoid them:

  • Stay Informed: Many investors overlook their liabilities, only to realize too late that they owe more than expected.
  • Plan for Cash Flow: If you’ve been leveraging equity, ensure you won’t face a cash shortfall after paying off your loan and taxes.

What Should You Do Before Selling?

Before you decide to sell, take these steps to protect yourself:

  1. Talk to Your Accountant: They can calculate your cost base and provide an estimate of your capital gains tax.
  2. Review Your Debt: Understand what debts you’ll need to pay off with the sale proceeds to ensure a smooth financial transition.

Let’s Navigate This Together

Selling an investment property is a significant milestone, and you don’t have to navigate it alone. By understanding your cost base, you can make decisions that align with your goals and avoid unnecessary stress.

If you’re thinking about selling or have questions about cost base calculations, we’d love to help. At Rise High Investor, we’re passionate about supporting you in achieving your financial dreams. Let’s work together to make your property investment journey a successful one!