Capital gains tax is a term that crops up from time to time when shopping for property, particularly investment property. And like most taxes, it’s a term that most of us just don’t want to know about! But if you’re buying or selling a property you’ll want to know exactly what it is and how it may impact you.
Capital gains tax (CGT) is a tax paid on any profit you make from the sale of any asset, not just property assets. Put simply, a capital gain is the difference between what you paid for an asset and what you receive when you sell it.
If you are a property owner, capital gains tax may become an issue when you make a profit from selling your property. But there are a couple of standard exemptions you should know about and ways you can make a profit from selling real estate without paying the full whack of CGT.
CGT exemptions for your family home
A full exemption from CGT applies if you are selling your family home or principal place of residence. The Australian Tax Office (ATO) considers a property your principal place of residence if you and your family live in the dwelling, your mail is delivered there, you keep your personal belongings there, you’re registered to vote at that property’s address and you have phone, gas and electricity supplied to the property in your family name.
You can only claim one principal place of residence at any given time, so if you have investment properties it should be noted that you can only claim a CGT exemption on the house in which you live. If you’re selling your principal place of residence and buying another one, you’re entitled to an overlap period of six months as long as the new property you are purchasing will be your principal place of residence once the move is completed and you lived in the old property for at least three continuous months in the 12 months before you sold it – and did not rent it out to tenants.
If you rent out your family home, CGT will apply to the proportion of time it was rented out. For example, if you owned the property for eight years, but only lived in it for six years and rented it out for two years, you would be liable to pay CGT on the two years it was rented out, so you would have to pay CGT on 25% of the profit you made from the sale.
Even if you do rent out your principal place of residence, you may be able to avoid paying CGT under the ‘Temporary Absence Rule’ as long as you don’t claim your new house as your principal place of residence when you move. Using this rule, your old home will be treated as your principal place of residence for up to six years and you can be exempt from paying CGT on the property when you sell and also be exempt from paying CGT on the income generated from renting the property out.
CGT exemptions for home renovators
If you live in your home for the whole time you own it and haven’t rented it out to anyone during the time you own it, then you are entitled to a full exemption on CGT when you sell. This even applies to a property you purchase to renovate and sell on, as long as you live in the property for three continuous months in the 12 months before you sell it and haven’t rented it out to anyone during the time you owned it.
This is a great rule if you plan to live a renovator’s life. You can buy a property, renovate and sell for a profit as many times as you like without paying a cent in CGT.
CGT and investment properties
Calculating the CGT payable on your investment properties can be quite tricky and you should always seek professional advice. Basically, if you own your investment property for longer than 12 months you are automatically entitled to a 50% discount on the CGT payable when you sell. In addition, the CGT calculation is made on the sale price of the property minus your expenses, so it is vitally important that you keep good records regarding your expenses for each of your investment properties.
Deductible expenses for investment properties include:
- Incidental costs including stamp duty, legal fees, agent’s fees, advertising and marketing costs.
- Ownership costs like home maintenance, rates, title costs and interest on your home loan.
- Improvement costs such as renovations to the kitchen or bathroom, addition of a swimming pool or garden and so on.
Once you have used these factors to work out the capital gain on your investment property, the figure is adjusted according to the period of time you owned the property and the period of time the property was rented out and not used as your principal place of residence.
Remember, this is general information and does not take your personal circumstances into consideration, so you should always seek professional advice from your accountant or financial adviser regarding CGT when you sell your property. It should also be noted that we are not authorised to give personal advice on taxation matters and other rules and regulations may apply to CGT that have not been mentioned here. For example, different rules apply to Australian citizens and foreign residents, and CGT may apply to other assets besides property.