Q: I’m preparing to sell my investment property and was looking forward to making a hefty profit, and then I heard about Capital Gains Tax. What is it and is there any way I can avoid paying capital gains tax?
A: Capital Gains Tax (CGT) can be complicated. Generally, CGT comes into play when you’ve made a profit or loss on a sold asset. This gain or loss is known as a capital gain or capital loss, and it’s basically the difference between what the asset cost you and what you get when you sell it.
There are a number of ways for CGT to be assessed and calculated, but there can also be ways to minimise how much tax you need to pay.
First, when working out the asset cost, don’t just include the purchase price or market value of a given property. You may also be able to include incidental costs like stamp duty, legal and agent fees, some ownership costs like rates, land tax, maintenance and home loan interest, and improvement costs like renovations, providing you haven’t claimed a tax deduction for them in any income year or can claim it in the current financial year.
Then you minus government grants such as the First Home Owners Grant and depreciable items. The ATO website has really comprehensive information about what can and can’t be included as a cost.
Including all possible costs may help you to reduce the amount of CGT you’ll need to pay.
Other ways to minimise your CGT may include:
- If you bought your property before 20 September 1985, though significant renovations or improvements since then may be subject to CGT;
- If you’ve owned the property for more than 12 months, your capital gain can generally be discounted by 50%;
- If the property was your main home or residence for a small or large period of time, you may be eligible for discounts or even a full exemption in certain circumstances;
- If the property was bought through a Self-Managed Super Fund and sold after retirement (no tax) or while still working (reduced tax);
- If your partner or dependents have separate homes; and
- If the property is a deceased estate, though there are restrictions to be aware of.
If a full exemption is applied then your capital gain or capital loss is disregarded.
If you end up with a capital gain, it will be added to your income for the current financial year and taxed at the applicable marginal tax rate.
If you end up with a capital loss, it can’t be deducted from your taxable income but it can be offset against other capital gains made that financial year, or carried forward for future years too.
So as you can probably see, CGT is complicated! With so many different partial or full exemptions possible for different scenarios, seeking professional advice from a property tax expert is a smart way to ensure you leverage all the exemptions available to you so you don’t pay more tax than you have to.
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