Here we are today to talk about yet another beneficial and informative topic for all you potential and current property investors, Capital Gains Tax!
Before we get into its nitty gritties, advantages, disadvantages et cetera, let’s understand Capital Gains Tax!
What is Capital Gains Tax?
Capital gain is the difference between what you paid for a property (minus any fees incurred during the purchase) and what you sold it for (minus any fees incurred during the sale). While Capital Gains Tax is the levy or tax you pay on the capital gain made from the sale of that property.
What does it apply to and how is it calculated?
Capital Gains Tax can apply to a plethora of things, including property, shares, leases, foreign currency, personal use assets et cetera purchased for more than $10,000.
Let’s understand by way of 2 simple scenarios-
Scenario 1 – Katy has a taxable income of $160,000 a year. She buys an investment property for $500,000 in January 2019 and sells it just a few months later, let’s say in June 2019, for $550,000. Katy’s new taxable income for FY2018 is $210,000 ($160,000 + $50,000) with standard tax rates applying for that income bracket.
Scenario 2 – Katy has a taxable income of $160,000 a year. She buys an investment property for $500,000 in January 2019 and sells it in 2021 for $550,000. Katy’s taxable income for FY2021 is $185,000 ($160,000 + $25,000), presenting significant tax savings.
So, why did Katy pay CGT on only $25,000 in scenario 2 whereas she paid CGT on $50,000 in scenario 1?
Here’s why. If an investor holds onto their property for more than 12 months, the profit they make when they sell their investment property will be taxed at only half the rate of the gain they incurred after selling the property. Therefore, in scenario 2, Katy was eligible for the CGT for her property at 50% discount.
While a 50% CGT discount is a benefit, you also don’t have to sell your property to realise your gains. Many investors refinance and access their equity to continue building their property portfolio.
The vast majority of Australians who own any rental property have to pay Capital Gains Tax when they sell or dispose of the property, so it’s essential to understand how CGT is calculated. Since the calculation can be slightly tricky, it’s best to have a tax specialist or consultant by your side!
CGT is only payable in the financial year in which you sell or dispose of your rental property and not throughout the period of ownership or in any financial year after disposal/sale/. Therefore, if you’re following a long-term wealth creation strategy, you do not need to worry about paying this for many years or possibly decades.
If you’ve lived in your property for at least 6 months once you purchase it, you may be exempt from the CGT.
However, there’s a catch! You must be able to prove it’s your primary place of residence, and the criteria used to determine whether it is your primary residence or not include the following
- You and your family live in it
- Your personal belongings are in it
- It’s your address on the electoral roll
- Your mail is sent to the address
- Services such as phone, gas and power are connected
Other than the above mentioned exemptions, there are also some common exemptions! Let’s take a look at what these other Capital Gains Tax exemptions are!
- Any property acquired before 20 September 1985, is known as a pre-CGT property. But the said property loses its pre-CGT status if substantial changes are made to it, like major additions to a building, or upon the death of the original owner.
- Any asset sold by an SMSF during the pension phase.
- If an investor holds onto their property for more than 12 months, the profit they make when they sell their investment property will be taxed at only 50% of the gain they incurred after selling the property.
- There is also a tax break known as the six-year rule. This tax break may be accessed if your permanent place of residence becomes a rental property which means that a property that was previously your PPOR can continue to be exempt from CGT if sold within six years of first being rented out.The exemption is only available when no other property is nominated as your primary residence.
- 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 usual could mean you pay capital gains tax at a lower rate!
Get in touch with our expert property consultants to know more about Capital Gains Tax and how you can maximally utilise it to your benefit!
Contact at 02-81230180 or drop us an email at email@example.com
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