How To Avoid Capital Gains Tax
Firstly, what is Capital gains tax (AKA CGT)... It is a levy you are obliged to pay on the capital gain made from the sale of an asset.
A capital gain (or loss) is the difference between what you paid for an asset and what you sold it for (less any fees incurred during the purchase). So, if you sell a property for more than you paid for it, there will be a capital gain. And if you sell it for less, that is considered a capital loss.
While it is always best to seek professional advice on how the law relates to your specific situation, this guide provides some handy information to set you on your way.
When do you have to pay capital gains tax on a property?
Generally, if a property is sold for a gain, CGT will apply. But there are always exceptions. For example, no CGT applies if the property is a person’s principal place of residence, i.e. their home.
Another common exception is if the property was purchased before September 20, 1985. But keep in mind that any significant improvements or renovations made since that date may be treated as a separate asset under the law and consequently subject to CGT.
Meanwhile, small business concessions on CGT may also apply if the property is used in relation to a business and the taxpayer passes a variety of tests.
How to avoid capital gains tax on your property:
There are a number of concessions and exemptions when it comes to paying capital gains tax, and numerous strategies designed to reduce your overall tax bill, too.
Here are some of the main strategies used to avoid paying CGT:
1. Main residence exemption
a. If the property you are selling is your main residence, the gain is not subject to CGT. However, the exemption may not fully apply if the residence has been used to produce income. In this case, a portion of the capital gain will be taxable.
Tip: The main residence exemption is only available to individuals and not to a company. Usually, it is not available to trustees though it may be available to the trustee of a deceased estate. Bear this in mind when buying a house, particularly if you choose to purchase through a corporate or trust structure.
2. Temporary absence rule.
a. An extension of the main residence exception, the temporary absence rule applies to a situation where you move out of your main residence.
You can continue to treat the property as your main residence indefinitely, or for up to six years if you initially buy a property as your main residence and later rent it out. And if you move back into the rented property within six years, the period is reset and can be treated as your main residence for another six years.
3. Investing in superannuation.
a. While self-managed super funds only attract a one-third discount for CGT, the standard tax rate for funds is only 15 per cent, meaning the maximum CGT rate is 10 per cent. Which is lower than most people’s marginal tax rate.
4. Partial exemptions.
a. Holding a property for more than 12 months will attract a 50 per cent discount in CGT, and you can also receive a partial exemption if you move into a rental property.
You are still entitled to a reduction in CGT if you use your main residence as a place of business, too.
Meanwhile, investing in affordable housing can attract a 60 per cent reduction in CGT – so long as the housing meets certain criteria and the rent is charged at a discounted rate.
As ever, though, make sure you seek professional advice to get the best outcome for your specific situation
5. CGT does not apply if you owned the asset before CGT started on 20 September 1985
A few extra tips -
#1 - If you start to earn income from your property for the first time, you will need to get a market valuation for the property on the date you commence your income-earning activity. It makes sense to get a market valuation done at that date by a qualified valuer.
#2 - Tip: If you purchase another property whilst absent, you only need to make the choice as to which property to treat as the main residence on disposal of the first dwelling, not at the time of the absence. This gives you an opportunity to plan and pick the property with a better tax outcome.
Obviously, we are not accountants, and this is not financial advice. These are just a few things to consider when buying and selling property. You should always consult your accountant and or financial planner.
Until next time!
Prop Culture