For a long time, the great Australian desire has been to buy real estate. Building wealth through real estate is a sure way to get financial freedom, whether you live in a busy flat in Sydney or Melbourne or a big house on the beach in Queensland. But when the time comes to sell your valuable asset, many investors are shocked by a harsh reality check from the Australian Taxation Office (ATO).
If you want to keep your hard-earned money safe, you need to know about capital gains on property in Australia. If you’re doing Australian property investment, knowing how to proactively manage your tax obligations can be the difference between a good return and a life-changing one. You have to pay taxes if you want to be a successful investor, but you don’t want to give the taxman more money than you have to. This full tutorial will explain how the CGT Australia property rules work and provide you five very practical and legal ways to lower your taxes and keep more of your money.
What does CGT stand for?
It’s crucial to know how the system operates before going over the tactics. In Australia, Capital Gains Tax isn’t really a separate tax. Instead, any money you get from selling an asset, like an investment property, is added to your taxable income for that year. You will then have to pay taxes on this sum at your marginal income tax rate.
Your capital gain is the difference between the “cost base” of your property (what it cost you to buy, hold, and sell it) and the final sale price. Selling a house in Australia usually results in a big cash gain because property values have historically gone up a lot over time. This unexpected rise in your taxable income could put you in the highest tax rate for that year.
Investors often want to know how to avoid capital gains on property. If the property is your main family home, you can usually only avoid it totally. However, there are some very effective ways to greatly reduce what you owe on your investment properties.
Use the Six-Year Rule as Your First Strategy
The ATO’s “Six-Year Rule” is a method you should know about if you want to lawfully avoid CGT. Most of the time, your principal house (the one you live in) is not subject to Capital Gains Tax. But the ATO does provide homeowners a break if they want to rent out their principal house.
You can still regard the property as your main residence for CGT purposes for up to six years when it is being rented out if you lived there first and subsequently moved away (maybe for business or travel).
You might not have to pay any CGT on the sale if you sell the house before the six-year period is up. If you move back into the property before the six years are up, the clock starts over. This means that you might be able to rent it out again in the future. You can’t claim another property as your main residence for tax purposes during this time, so keep that in mind.
Strategy 2: Keep the Property for More Than a Year
This is the most important rule for Australian property investment. You will have to pay tax on 100% of the capital gain if you acquire a home and then sell it within 12 months. This means that “house flipping” for a short time is a very taxed business in Australia.
If you keep the investment property for at least 12 months before signing the selling contract, you can get a 50% CGT deduction. This means that just half of your total capital gain is counted as taxable income. If you sell a property you have held for five years and make $100,000, only $50,000 will be added to your taxable income. Holding for the long term is not only a good way to invest, but it is also a very important way to lower your taxes.
Step 3: Make the Most of Your Cost Base
The ATO figures up your capital gain by taking the sale price and subtracting your “cost base.” So, if your cost base is higher, your taxable capital gain will be lower. A lot of investors think that the cost base is only the sum they paid for the property when they bought it. In actuality, it comprises a lot of costs that come with buying, owning, and selling the asset.
To get the most out of your cost base, make sure you keep detailed records of:
- Costs of buying: stamp duty, legal expenses, conveyancing fees, and reports from building inspections.
- Costs of holding: council rates, land tax, and insurance (only if you haven’t already claimed these as tax deductions when you rented the property out).
- Capital improvements: the costs of putting on an addition, remodelling a kitchen, or putting on a new roof, as long as these weren’t claimed as repairs or depreciating assets.
- Expenditures of disposal: commissions for real estate agents, advertising expenditures, and legal fees related to the sale.
By taking every dollar that is eligible, you lower the profit margin that the ATO can tax.
Strategy 4: Use Capital Losses to Cancel Out Gains
If you have other investments that haven’t done as well as your property, selling them can actually help you with your taxes. You can use capital losses to lower your capital profits.
For example, if you sell your investment property and make a $100,000 capital gain, but you also sell a parcel of shares at a $20,000 loss in the same financial year, your net capital gain goes down to $80,000 (before the 50% discount is applied).
Also, if you had a capital loss in a previous financial year and didn’t use it, you can carry that loss forward indefinitely to offset future gains. Selling your underperforming assets at the same time as your lucrative property is a smart method to lower your tax bill.
Strategy 5: Increase the Amount You Put into Your Superannuation
A capital gain is added to your normal income, so if you sell a property for a profit, your income will probably go up to a much higher tax band for that year. Making concessional (before-tax) payments to your superannuation fund is one of the best strategies to minimise your taxable income.
You can choose to put more money into your super up to the yearly concessional cap, which is presently $27,500 but might change. If your super balance is less than $500,000, you may be allowed to employ “carry-forward” regulations. This lets you use unused concessional cap amounts from the last five financial years.
By putting some of your property gains directly into your retirement fund, you can claim a huge tax deduction, which lowers your marginal tax rate and sets you up for a wealthier retirement at the same time.
Work with the Property Experts
It might be very hard to understand the details of CGT Australia property rules. These tactics work quite well, but tax laws are always changing, and every investor’s financial condition is different. If you make a mistake, you could get fined a lot of money or leave thousands of dollars on the table.
That’s where we come in. We at Property NXT help regular Australians find their way through the ever-changing world of real estate. Our staff is here to help you every step of the way, whether you want to buy your first investment, create a strong national portfolio, or sell an asset in a smart way to get the most money back. We think it’s important to give our clients the information and resources they need to really gain financial freedom through property.
You can choose to put more money into your super up to the yearly concessional cap, which is presently $27,500 but might change. If your super balance is less than $500,000, you may be allowed to employ “carry-forward” regulations. This lets you use unused concessional cap amounts from the last five financial years.
By putting some of your property gains directly into your retirement fund, you can claim a huge tax deduction, which lowers your marginal tax rate and sets you up for a wealthier retirement at the same time.
Don’t let your fear of taxes stop you from reaching your property goals. We would love to hear from you if you are ready to make your portfolio better, lower your debts, and protect your financial future.
Please Contact us today by going to Property NXT and talking to one of our property investment experts.
