Cost base
The total you count as having paid for an asset, used to work out your capital gain when you sell.
Your cost base is more than the purchase price. It includes incidental costs of buying and selling — stamp duty, conveyancing, brokerage, valuation and advertising fees — plus certain ownership costs and capital improvements.
For property, capital improvements such as a new kitchen or an extension are added to the cost base. Repairs and maintenance are not, because those are deductible against rental income instead.
Every dollar you can legitimately add to your cost base is a dollar removed from your eventual capital gain. Since the gain is taxed at your marginal rate, careful record keeping over decades of ownership is worth real money.
Buying at $600,000, selling at $800,000
Add $28,000 stamp duty, $2,000 legal fees on purchase, $45,000 for a renovation and $18,000 of agent commission on sale. Your cost base becomes $693,000, cutting the gain from $200,000 to $107,000.
The bit people get wrong
You cannot include costs you have already claimed as a deduction. Interest and rates claimed against rental income cannot also be added to the cost base — the ATO will not let the same dollar work twice.
Common questions
What records do I need to keep?
Purchase and sale contracts, settlement statements, and receipts for every improvement and incidental cost. Keep them for at least five years after the sale, which in practice means decades for a long-held property.
What if I inherited the asset?
Special rules apply. Depending on when the deceased acquired it, you may inherit their original cost base or use the market value at the date of death.
Do renovations reduce my capital gains tax?
Capital improvements are added to your cost base, which reduces the gain and therefore the tax. Ordinary repairs are treated differently because they are already deductible against rental income in the year you incur them.
Run your own numbers