As a property investor in Australia, you can potentially SIGNIFICANTLY reduce your tax liability by understanding the capital gains tax rules and strategically managing your investments.
In this guide, we take you through the various aspects of CGT, including exemptions, the six-year rule, and ways to reduce CGT payments.
What is Capital Gains Tax (CGT)?
- CGT is the tax paid on the profit from the sale of an investment property.
- It’s calculated as the difference between the purchase price and the selling price.
- This profit, if any, must be reported in your annual income tax return.
- CGT payable when a CGT event is triggered, such as selling the property.
- The timing of the event affects the tax outcome, so understanding this is crucial.
Exemptions and Discounts:
- To minimise CGT, property investors should be aware of several exemptions and discounts.
- The main residence exemption allows homeowners to avoid CGT if the property is their primary residence.
- Other exemptions include the 50% CGT discount (applicable after holding the property for over 12 months) and the six-month rule (which treats two properties as the main residence for up to six months).
The Six-Year Rule:
- The CGT property six-year rule is a valuable strategy.
- It allows investors to treat their investment property as their main residence for up to six years while renting it out.
- Selling the property during this period exempts the investor from CGT, similar to their primary residence.
Rules and Limitations:
- There are specific rules governing the six-year rule:
- You can’t treat another property as your main residence during the same period.
- The property must first be considered your main residence before renting it out.
Handling Multiple Absences:
- Each period of absence from your primary residence is treated separately.
- The six-year rule resets when you move back into your home, provided the combined absences do not exceed six years.
Reducing CGT:
- Investors can reduce CGT by increasing the property’s cost base.
- This involves adding various expenses to the cost base, such as legal fees, improvement costs, and ownership costs.
- A higher cost base leads to a lower CGT liability.
Capital Gains Reduction Report:
- A Capital Gains Reduction Report prepared by a quantity surveyor streamlines the process.
- It considers all capital expenses, providing an accurate cost base.
- This helps investors reduce CGT when declaring their annual income.
Key Takeaways:
- Understanding CGT and utilising exemptions can result in substantial tax savings.
- Investors can reduce their CGT liability through the six-year rule and increasing the cost base.
- It is often a good idea to have a depreciation schedule prepared by a quantity surveyor. Please feel free to reach out to our team for the details of our preferred quantity surveyor.
For more information and any queries about potential CGT on your investment property, don’t hesitate to get in touch with our friendly team.
