How to avoid capital gains tax (CGT) when selling a property…

What is Capital Gains tax?

When you have an asset, such as an investment property, when it comes to selling you may find that you have made either a capital gain or a capital loss.

A capital loss is when you have sold your investment property for less than you bought it for.

While a capital gain occurs when you have been fortunate enough to have sold your investment property for more than you paid for it.

But before you crack open the most expensive champagne, in this case, you need to consider capital gains tax.

According to the Australian Taxation Office capital gains tax is the tax you pay on profits such as selling property. And it has to be paid in the financial year that the property was sold.

When do you have to pay Capital Gains Tax on a property?

Not every property incurs capital gains tax when it is sold for a profit.

If it is your own that you live in then you are home free, with no capital gains tax occurring.

Also if you have bought the property before September 20, 1985, it does not incur capital gains tax.

However if it is an investment property that has been sold for a profit then capital gains tax applies.

This includes rental properties, holiday houses, hobby farms, vacant land and business premises.

Properties that are flipped – renovated and sold without being your main residence – are also up for capital gains tax.

How is Capital Gains Tax calculated on property?

The capital gains tax in Australia is calculated by treating the net capital gain on the property as taxable income in the year that you sold your property.

The first step then is to record what you received when you sold the property. If you decide to give away the apartment to a relative or friend, take note that the market value of the property is what is considered as the sale price – in order to work out the net capital gain.

When working out how much you paid for the property remember to include not just the sale price, but also other costs that come with buying a house or unit such as the cost of transfer, stamp duty and borrowing expenses such as a loan application fee.

How to avoid Capital Gains Tax

It is important to remember that there are ways – all very legal – to also avoid capital gains tax on your investment property along with minimising the amount you pay. We now explain the ways to do this.

Wait for one year

When you own a property for at least 12 months then you can reduce your capital gains tax by fifty per cent. This is a substantial amount, however it applies only when an individual owns a property rather than a company. It also applies only to Australian residents.

Use the main residence exemption

The capital gains tax only applies to investment properties – that is ones that you make money out of. So generally this means that if the property is your home, then it is exempt from this tax.

There are conditions to consider however, to make sure it fits into this category. Firstly the home has to have been your place of residence for you and your family. If it has been an investment property for some of the time that you own it, then it doesn’t fit this exemption.

Also it is important to be able to prove that the home has not been used for making any income. For example it can’t be a home that along with renting out, you have not been using it as a business.

Use the temporary absence rule

If you move out of your former home it can also be exempt from capital gains tax. You can treat the property as your main residence indefinitely.

Or if you initially buy it and then rent it out it can be considered under the temporary absence rule for up to six years. If you then move back into the property within the six years then it can be treated as your main residence for another six years.

It is important to remember that no other property can be treated as the main residence for tax purposes during that time.

Get the property reassessed before renting it out

If you are renting out a room in your home, you will also be required to pay tax on the rental income.

However the capital gains tax will only be due for the period that the room is rented out – and therefore producing an income.

In such a case it is worth getting the property valued before you start to rent out the room.

Invest in superannuation

Another way to minimise capital gains tax on your investment property is if it has been acquired under a self-managed super fund.

Self-managed super funds receive a discount of one third on capital gains tax, the standard tax rate for funds is 15 percent, which means that the maximum capital gains tax is 10 per cent. This is likely to be lower than many people’s marginal tax rate.