capital gains tax

How to Reduce Capital Gains Tax When Selling an Investment Property

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Sarah Boyle

Knowing how to avoid capital gains tax when selling an investment property seems like the Holy Grail of investment knowledge, even when people don’t entirely know what it is. Over the years, capital gains tax has cemented itself as a buzz phrase in the Real Estate world, causing many to see it as a looming spectre over any investment opportunity they may want to sell. However, with the right understanding and preparation, this tax can be minimised or avoided entirely.

So, if you’re preparing your property for sale, here are a few tips on how to avoid capital gains tax when selling an investment property.

Understanding Capital Gains Tax (CGT)

Before we get into capital gains tax, it’s important to understand what it is we’re talking about:

What Constitutes a Capital Asset?

A capital asset is a piece of significant property that holds a considerable value and is not directly intended to be bought or sold during regular business operations. This can include houses, bonds, collectables, stocks, etc., whilst also including significant items a business may buy to assist in regular operations. As an example, if a company buys an expensive item to use, it’s a capital asset, but if it’s bought specifically to sell, it’s inventory.

Is Capital Gains Its Own Tax?

While it may be surprising to some, capital gains tax isn’t an isolated tax on its own. It is, in fact, a portion of your income tax, with any capital gains being added to your assessable income. It’s also important to keep in mind that tax is not withheld specifically for capital gains, so be sure to set aside adequate funds to cover this come tax time.

So, What is Capital Gains Tax?

Selling a capital asset generally leads to you making a capital gain or loss, defined by the difference between what the asset cost you to acquire and what you then received when selling it. Any gains are then considered part of your taxable income, and you will be required to pay accordingly.

Are There Any Direct Exemptions to Capital Gains Tax on a Property?

The short answer is yes, but only under specific circumstances. CGT exemption can be given to a property if it acts as your main residence, meaning that:

  1. Your property has a house, unit or dwelling on it.
  2. You have lived in said dwelling.

There are other factors that may be considered when determining if a dwelling is your main residence, including:

  1. If you and your family members live on the property.
  2. If the furnishings and other personal belongings within the dwelling are yours.
  3. If the property is also your mailing address.
  4. If the property is labelled as your main address on the electoral roll.
  5. You have utilities connected to the property in your name.

Regardless of circumstances, this exemption will not be given to a vacant block. It is also unlikely that you will receive the exemption if you were not an Australian resident (in regards to taxation) during your time living on the property. This change was included in the 2017-18 budget and came into effect on the 9th of May, 2017. Therefore, if you are a foreign resident that already held property prior to this date, you were still able to receive this exemption until the 30th of June, 2020.

There is also a period after purchasing a new property to move into when both the property you are moving from and your new property can be considered your main residence for CGT purposes. This is referred to as the “temporary absence rule”. This period can last up to six years in instances where you are using the previously-lived-in property to produce income.

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