What is capital gains tax and how does it impact the sale of my investment property?
One of the great aspects of an investment property is that it can rise in value over time to give you a capital gain. The way this gain is taxed can be complex, and it’s worth understanding how capital gains tax affects you as an investor.
Unlike the home you live in, which is generally tax-free, capital gains tax (CGT) can apply to any profit you make on the sale of a rental property.
CGT can be assessed and calculated in a variety of ways, and there may also be opportunities for you to minimise the amount of CGT you pay.
When it comes to working out your capital gain, the Tax Office allows buying costs like stamp duty and legal fees to be added into the purchase price. On the flipside, selling costs such as legal fees and agent’s commission can be deducted from the sale price.
In this way, your taxable capital gain can be trimmed, which highlights the value of including every possible purchase cost or selling expense in your CGT calculation.
Another way to lower your CGT bill is to hold onto the place for the long term. If you own the property for over 12 months, the capital gain can generally be discounted by 50%.
While CGT can sound like a separate tax, it doesn’t come with its own tax rate in the way that, say, goods and services tax (GST) does. Capital gains are just added to your regular income for that financial year, and you’ll be taxed at your personal marginal tax rate.
CGT can be complicated, and it’s a good idea to speak with your tax professional. That way you can be sure you get everything right, while still claiming all the exemptions available to you so you don’t pay more tax than necessary.
Calculating returns on your property investment
A rental property has the potential to earn two types of returns – rental yield (income) plus capital growth (increase in property value). The two added together make up the total return on your property.
To work out the rental yield, divide the annual rent by the value of the property, and then multiply the result by 100 to get a percentage return on investment.
As a guide, if your property is worth $500,000 and you receive annual rent of $26,000, the gross yield is 3.12% (that’s $26,000 divided by $500,000 x 100).
Capital growth is the percentage increase in your property’s value over time. If a property is worth, $600,000 at the start of the year, and rises in value to $630,000 by the end of the year, it has achieved capital growth of 5%.
Understanding how to calculate the returns on a property lets you see how your investment is performing relative to other investments.
When you’ve decided that investing in property is right for you, an Aussie Broker by your side can help you unlock your investment strategy.
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- Chapter One : Things to consider before investing in property
- Chapter Two : Determining where to invest
- Chapter Three : Investment Properties by Dwelling Types
- Chapter Four : Finance for Your Investment Property Purchase
- Chapter Five : How to Invest in Property
- Chapter Six : Adding Value to Your Investment Property
- Chapter Seven : Positive and Negative Gearing
- Chapter Eight : Getting Your loan
- Chapter Nine : Selling your Investment Property