Property Taxes Part 2 – Capital gains tax

Real estate seems to have rebounded – no doubt about it. But often there’s more to buying a property than might first appear on the surface. Last blog, we wrote about the up front (Stamp duty) and ownership (Land tax) costs you might encounter. But what about the costs payable on the backend, when selling, like Capital Gains Tax. First things first… 

What is Capital Gains Tax?

Commonly known as CGT, Capital gains tax is the tax you pay on the sale of assets purchased after September 20, 1985, when you make a profit. CGT isn’t just payable on profits made from selling property assets, but for the purposes of today’s blog, we’re going to keep it simple and stick with property.

When is it payable?

Unlike stamp duty which is triggered on purchase, or land tax payable on a yearly calendar date; capital gains tax payments aren’t ‘triggered’ when you sell. Regardless of whether you make a profit or a loss, the time to pay it is when you declare your profit (or loss) on your yearly income tax return. It’s not a separate tax, it’s just reported as part of your overall earnings for the year.

But key to know here is that the point when you make a gain or loss isn’t when the money hits your bank account (ie: when you settle). Rather it becomes declarable in the tax year when you sign the contract. In most cases, it’s likely to be in the same year. However, if you agree to sell your property (and sign the contract) in late May 2021 and settle in July 2021, then the gain/loss will be reported in your 2020-2021 tax return. 

How can I get an idea of what I might be up for?

A lot of the banks have their own calculators for this. Or you could use the ATOs calculator.

Please note: whilst these tools will give you a good idea of what might be payable, they don’t take your personal circumstances into account. So it’s always best to check with your accountant.

Is Capital Gains Tax payable when I sell the property that I live in?

If the property you’re currently living in is your primary residence, then no, CGT generally doesn’t apply. It’s one of the reasons why, if you’ve owned a home, your wealth has increased significantly over time.

Generally we think of capital gains tax as being payable on investment properties, holiday rental properties, hobby farms, etc.

It is payable, however, on properties that you might personally use as a second home/weekender, etc. As we’ve often said with all things ATO, there’s no free lunch here.

However, there can be a bit of a fly in the ointment when discussing CGT on your home. You might be thinking ‘but you just said it doesn’t apply to my home’. Well, yes – unless at any point you’ve rented your home out or you’ve used it to run a business (and paid your mortgage/rates as a business expense). We’d always advise seeking professional advice prior to renting out your home or using it as your primary place of business (aside from working from home as many people have had to do due to Covid in 2020).

CGT doesn’t apply to personal use assets such as a car or furniture. Nor does it apply to assets that depreciate over time such as rental property fittings or furniture or business equipment/plant. 

Minimising your CGT

In a nutshell, the quickest way to minimise your CGT is to hold your property asset for longer than 12 months. After the 12 month mark, you’re likely to receive a 50% discount on your capital gain (if you’re not a foreign resident) – but you’ll want to check this with your accountant.

And as with all things tax related, you’ll want to keep a record  or every relevant receipt you collect whilst you hold the property (stamp duty, agents fees, marketing fees, land tax, rates, maintenance, renovations, etc). Having all that information handy means that you can more accurately report your gain (or loss) and avoid paying too much tax.

If the property is a 2nd or investment property, you might want to rent it out for a few years and then live in it (as your primary residence) for a couple more. That way, you only pay CGT on the value prior to you living in it. But again, you’ll want to seek advice first.

If you have a level of say over when you sell, you might want to talk to an accountant about when it would be best to sell. Ie: if you’re about to retire and you’ll be earning significantly less next tax year and you’re likely to make a significant capital gain on selling, it might be worth your while holding off on the sale.

And that’s where we can help. If you’re looking to work with an accountant who not only understands tax law but is also keen to get to know you as a person and take your personal circumstances into account, we’d love to chat. You can reach us on 02 6023 1700 or you can drop us a note via the form below.