Tips on minimising your property’s capital gains tax
Capital gains tax (CGT) is something to think about once you start to embark on wealth creation strategies. It’s the tax we pay when we sell an asset such as a house and, depending on your tax bracket, can be as much as 45% on your property’s capital gain. The tax is claimed by adding the profit made from the asset to your total income for that tax year.
The good news is, there are strategies you can undertake now to reduce and sometimes even avoid it altogether. We take you through some tips on how to do just that:
- Move in right away
If your property is deemed your Primary Place of Residence (PPOR), you’ll be exempt from CGT. This means all the profit from the sale of the property will be yours. Plus, if you’ve purchased a new home as your place of residence, you’ll be eligible for the First Home Owners Grant (FOHG).
Even if you rented the property out for a few years before moving in, there are still ways to reduce the CGT – so don’t panic. The ATO will look at the proportion you rented to lived in. The CGT is then calculated based on the total time the property was rented. So, if you rented the home for 2 years and then lived in it for 8 years, you’d only pay CGT on a quarter of the total profit.
- Hold on to it for more than 12 months
Depending on what market you are in, ‘flipping’ a property can be profitable. This is where you buy something, renovate, and then sell for a profit. If you do this in under a year, you can get stung quite heavily with CGT. However, once you’ve owned the property for more than 12 months, you’re automatically entitled to a 50% tax discount on any profit (or capital gain) you make when selling the property.
- Take advantage of the 6-year exemption
If the property has been your main residence for over 12 months then you could be entitled to a 6-year exemption. However, this only qualifies if you don’t use another property as your main residence during that time. For instance, if you bought a property, lived in it straight away for 2 years, and then moved overseas – if you decided to sell it within 6 years, you’d be exempt from CGT.
- Use your Self-Managed Super Fund
If you have a DIY Super Fund i.e. self-managed or SMSF, then you can purchase s property along with a SMSF home loan to avoid CGT. There are some quite stringent rules with regards to this so you would need to gain some profession advice before going down this route.
- Choose your primary place of residence wisely
If you have more than one property, you have the power to choose which you would like to treat as your main residence. This is granted by the ATO and means, if you decide to sell, you could save a lot of money by choosing the property with the higher capital gain as your Primary Place of Residence. If this is something you see yourself doing, take a look at the ATO website for more details on treating a dwelling as your main residence after your move out.
Article provided by Liston Newton Advisory