You own an investment property. Since you bought it, the value has just gone up and up. The thought of unlocking that equity has you dreaming of far-flung destinations and shiny new toys. But before you crack open that nest egg, make sure you do your research.
Knowing the implications of, and how to avoid, capital gains tax when selling an investment property could save you a small fortune. In this post, you’ll learn what it is, when it applies and tips to reduce the taxes on selling a house.
So what is capital gains tax?
To put it simply, when you sell an asset—like shares or property—the difference between how much you paid for it and how much you sold it for is known as a capital gain or, if you lost money, a capital loss. You then need to report that gain, or you can deduct that loss, in your annual tax return.
When does it apply?
If you are selling a property that you purchased as an investment after 1985, then any profit you make over and above the cost of acquiring and maintaining it is considered a capital gain and therefore subject to tax. The exception is when you are selling your family home. The waters become a little muddied if you have both lived in the house and rented it at some point and, if that’s the case, talk to a tax accountant to find out how long you have to live in a house to avoid capital gains tax.
How much will it cost me?
Though it sounds like it’s a different tax, capital gains tax on the property is actually treated as part of your income tax assessment in your annual tax return. That’s a handy thing to know because, when it comes to calculating how much you owe, it depends what income tax band your capital gain pushes you into for that particular financial year. Not surprisingly, the Australian Tax Office (ATO) has a wealth of information on this.
Are there ways to avoid capital gains tax?
To get the best possible advice on how to avoid capital gains tax in Australia, you should talk to a tax accountant. They’ll consider all the options and help you avoid or reduce the amount you are liable to pay, including whether you are eligible to claim that the property you are selling is actually your primary residence.
But there are some things you can do to minimise your capital gains tax. To keep it simple, follow these three-pointers:
1. Hold on to any investment property for more than 12 months and you could receive a 50% discount on your capital gain.
2. Keep detailed records of all your spending on the property from the day you purchase it, to potentially offset the gain down the track.
3. If you are selling an investment property, make the most of a low-income year. As capital gains tax is considered part of your income, a year in which your earnings are expected to be lower than normal could mean you pay capital gains tax at a lower rate.
Where can I find more information?
If you’d like to know more about capital gains tax visit the Australian Taxation Office, National Australia Bank and DIY Property Investment websites.
Please note: The content is of this blog is based on online research from the resources above and should only be used as a guide and not legal tax advice (based on the information available at the time of publication). Please contact your tax account or visit ATO website if you require tax advice or more information on capital gains tax.
