If you’re selling or planning to sell an investment property, be prepared to pay a capital gains tax on the investment property. The tax amount is the difference between how much it cost you to acquire the property and what you’re expected to make from its sale. If you’re wondering how to avoid CGT on investment property, you’ve come to the right place.
In this blog, we go through some expert tips on how to avoid capital gains tax in Australia through exemptions and other strategies.
The Capital Gains Tax (CGT) is levied on the profit you make from selling an asset, such as an investment property. Your profit is the difference between what you paid to buy and improve the property and the amount you sold it for. In taxation terms, this profit is referred to as capital gain.
This capital gain is added to your regular income and taxed at your usual rate. The amount of CGT payable depends on the profit made from the sale, the length of ownership, and the ownership structure. Understanding these elements will help you in minimising your CGT amount.
If the property has been the primary place of residence for you and your family, it may qualify for the main residence exemption. This is particularly beneficial if you have lived in the property for a substantial period before renting it out. To take full advantage of this capital gain tax exemption, ensure that the property is genuinely your main residence and maintain clear records of your living arrangements.
The six-year absence rule, also known as the 6-year capital gains tax rule, allows you to treat an investment property as your main residence for up to six years even after you move out and rent it. This means you can claim a CGT exemption for the period you lived in the property and up to six years after moving out, provided you don’t treat another property as your main residence during this time.
If you operate a small business from your property, you could benefit from small business CGT concessions. These concessions include the 15-year exemption, 50% active asset reduction, retirement exemption, and rollover provisions, which can reduce or even eliminate CGT under certain conditions.
One of the simplest ways to reduce CGT is to hold the property for more than 12 months. Properties held for longer than a year qualify for a 50% CGT discount for individuals and some trusts. This means only half of the capital gain is added to your assessable income, significantly reducing your tax liability. This makes for an excellent strategy for long-term investors.
If the property was your main residence for part of the ownership period, you might be eligible for a partial exemption. This involves calculating the proportion of time the property was your main residence versus the time it was rented out, applying the main residence exemption proportionately.
If you have other investments that are performing poorly, selling them at a loss can offset the gains from your property sale. Capital losses from other investments can be used to reduce capital gains in the same financial year or carried forward to offset future gains. To effectively employ this strategy, it is essential to keep track of all your capital losses and gains across different assets, requiring careful financial planning.
The timing of your property sale can significantly impact your CGT liability. Consider selling the property in a year when your overall income is lower, which could place you in a lower tax bracket. This strategy might be particularly beneficial if you plan to retire or take a break from employment in future.
Investing in improvements to your property can be a double-edged sword. While substantial renovations can increase your property’s value, they also add to the cost base, which reduces your capital gain. Keep detailed records of all improvement costs, as these can be deducted from your capital gain calculation.
Tax laws are complex and constantly evolving, so consulting with tax experts is vital. They can provide tailored advice based on your specific circumstances, ensuring you utilise all available exemptions and strategies to minimise CGT.
Having professional assistance will also ensure all your records are well-maintained. Keeping detailed records is essential for accurately calculating CGT and substantiating any claims. Keep all purchase and sale documents, improvement costs, rental income, and expense records. Detailed documentation will make it easier to calculate your capital gain and demonstrate eligibility for exemptions or deductions.
Minimising capital gains tax on your NSW investment property requires strategic planning and professional advice. You need a thorough understanding of the tax laws to leverage exemptions like the capital gains tax property 6-year rule and main residence exemption. Additionally, effective strategies like holding period and timing of sale can reduce your CGT payable amount.
If you want to learn more about how to avoid capital gains on a rental property, get in touch with Romeo Property Valuers. Our team of experienced professionals will help you with your property investment decisions.
For property valuations in NSW or other assistance, contact us today.
Disclaimer: We are not financial planner or accountants and are not qualified to give tax or legal advice and the above content should not be treated as such, this is our opinion only. If you require further information or wish to discuss this matter further, please feel free to contact the office at 9712 0260 or me directly on 0438080786