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When it comes to Capital Gains Tax (CGT) there’s a lot to understand. Breaking things down, we offer solutions to common problems and tips to minimise the tax you pay.
Capital gains tax (CGT) can be a confusing area for property investors, but it’s crucial to understand the potential CGT implications of any decisions that you make.
Savvy property investors are aware of the most common CGT mistakes and plan to avoid them. They also take steps to reduce the amount of CGT that they need to pay.
CGT is a tax that’s applied to the profit on the sale of many types of assets in Australia, including investment properties.
Your profit (i.e. your capital gain) is the difference between your property’s selling price and its cost base. The cost base includes the property’s purchase price plus some of the costs of buying, holding and selling it, such as stamp/transfer duty, depreciation, real estate agent commission and conveyancing fees.
Depreciation can be easily overlooked when it comes to calculating CGT on an investment property because it is not an out-of-pocket expense.
However, any depreciation expense on property assets (like light fittings, ovens and floor coverings) can be deducted from your cost base to reduce the amount of CGT that you pay.
Unlike investment properties, your principal place of residence is exempt from CGT. If you ever live in your investment property for any length of time while you hold it, then you will therefore be exempt from CGT for that period.
In addition, if the property is initially your principal place of residence and then subsequently becomes an investment property, you can qualify for a subsequent CGT exemption for up to six years.
If you do this, it makes you ineligible for CGT concessions (like the 50% CGT discount for properties held for longer than 12 months), so you will end up paying more CGT.
CGT rates vary depending on whether you buy your investment property as an individual or via a family trust, self-managed super fund (SMSF) or a company. The best decision for you will depend on your individual circumstances, and you should seek professional advice.
If you buy as an individual or via a family trust, then your capital gain will be taxed at your marginal rate of tax, less a 50% discount on the gain if you own the property for more than 12 months. For example, if you make a capital gain of $250,000, you will only be taxed on $125,000 of the gain.
If you buy your investment property in the name of your SMSF and own it for at least 12 months, then your capital gain will be tax-free if you are in the pension phase. If you are in the accumulation phase, then your capital gain will be taxed at 10%. Note that this rate is lower than the standard SMSF tax rate of 15% (which is lower than even the lowest marginal tax rate if you earn more than $18,200).
If you buy your investment property in a company name, the CGT rate is 30% (which is lower than the marginal tax rate if you earn more than $45,000).
This includes all financial records of your property buying and selling costs, as well as your depreciation expenses while you’re holding the property.
It also includes keeping records of dates if you ever use the property as your principal place of residence.
CGT is based on contract exchange dates, rather than settlement dates. If you can, try to avoid making your sales contract exchange date late in the financial year (for example, in May or June). Making it earlier in the financial year instead will delay your CGT obligation and give you an opportunity to maximise your other income tax deductions during the rest of the financial year.
At DPN, we don't just sell investment properties. We partner with clients to offer strategic investment advice, including helping them understand the impact of selling property and associated costs. You can also seek independent financial advice, such as from an accountant.
Contact us today to find out more.
The information provided is general in nature and should not be taken as advice. It does not consider your personal circumstances, needs or objectives. We recommend seeing your accountant to determine the best strategy for you.
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