Friday October 4 2019

How to minimise capital gains tax when selling property

 

This article was published by realestate.com.au and appears originally here.

 

For investors who don’t understand it, capital gains tax can be a bit of a “boogey man”. But with a bit of knowledge and planning, it’s possible to substantially reduce how much of it you pay – or even avoid it altogether.

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, capital gains tax (CGT) will apply. But there are always exceptions. For example, no CGT applies if the property is a person’s main 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 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 is capital gains tax calculated on property?

CGT is calculated based on the amount of profit you make from a property’s sale, your marginal tax rate, and the tax deductions for which you’re eligible.

Brendan Dixon of Pure Finance says gross capital gain can be defined as the sale price, minus the purchase price and associated costs.

When a property has been held for more than 12 months, a 50 per cent discount is generally applied to the gain. However, companies are not entitled to this discount, nor foreign residents who bought their property after 8 May 2012, and self-managed super funds only get a discount of one third.Dixon adds that you need to factor into your CGT estimations any other income you earn during the year in which you sell your property, as your marginal tax rate will affect how much CGT you ultimately pay. This is because CGT is not really a separate tax, but rather part of your income tax considerations. 

 

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