What is Capital Gains Tax?
You likely know, if you’re involved in property investment, that you’ll be required to pay capital gains tax (CGT).
Yes, it’s a familiar piece of jargon – but the details of the tax, and the way it works, might not be fully understood by everyone. So we thought we’d put together a little guide to help you get to grips with it.
Basically, CGT is required to be paid on any capital gain earned on the sale of an asset – including property. This applies to any asset obtained after 19th August 1985.
What is a capital gain?
Put simply, a capital gain is the result of profit made from the sale of an investment – that is, when the sale price exceeds the original purchase price.
The inverse is a capital loss: when your investment property is sold for less than at purchase. If you make a loss rather than a gain – well, there’s an upside - you will not be taxed.
It’s a straightforward case of taking the selling price of the property, then subtracting the amount you originally paid for it (taking into account any associated costs such as stamp duty and legal fees). The amount remaining will be your capital gain.
How to avoid, or reduce, capital gains tax
There are some ways to actually prevent having to pay CGT – or at least reduce the amount payable.
1. Become an owner-occupier
While any investment properties sold will be subject to CGT, you do not have to pay this tax on every property you buy and sell. Your main place of residence is exempt, as long as you have never rented it out.
So if you live in the property right after acquiring it, it’ll be exempt from CGT.
Note, that while this doesn’t apply if you rent it out, if you do move in at a later date, you will be entitled to a partial exemption.
2. Wait things out for one year
An eligibility of a 50 per cent reduction of the CGT payable may apply if you purchased the property after 21st September 1999. That’s only if it was owned for at least one year before selling - and purchased by an individual, trust or complying superannuation entity.
3. Get the property reassessed before renting it out
Capital gain is calculated by the difference between the final sale price and the property value at the time it was rented.
A licensed valuer, consulted before renting it out, will provide you with a new cost base from which to calculate any future gains.
4. Use exemptions like the “6-year rule”
If you rent out your property for six years or less, you can use this to gain a full capital gains tax exemption … well, as long as you’re not treating another property as your main residence.
Note the so-called “6-year rule” refers specifically to the time your property has an active tenant. A property rented out for nine years, for example, but remains vacant for several months (amounting to three years), will still be eligible for exemption.
5. Use an SMSF home loan
The only catch is that you’re not allowed to live in the home until you’re eligible to receive your pension.
Once you’re a retiree, you can sell the property you’ve bought with your SMSF without having to pay capital gains tax.
Note that we’ve provided this article just for information purposes. Please seek advice from a licensed tax adviser before making any major decisions!