If you sell an investment property, you’re likely to incur capital gains tax (CGT). However, with proper planning and strategy, you can significantly reduce the amount of CGT you pay—or even avoid it altogether. Here’s how CGT works and the strategies you can use to minimize or eliminate it.
What Is Capital Gains Tax?
CGT is the tax you pay on the profit (or capital gain) from selling an asset. The gain is calculated as:
Sale price – Purchase price – Associated costs = Capital gain
For example, if you buy a property for $500,000 and sell it for $750,000, your capital gain is $250,000 (less any eligible expenses).
If you sell an asset for less than its purchase price, the result is a capital loss.
It’s important to note:
- CGT only applies to assets purchased after 20 September 1985.
- CGT can be complex, so professional advice is essential.
How to Minimize or Avoid Capital Gains Tax
There are several legal strategies to reduce or avoid CGT, including:
- Main Residence Exemption
If the property is your primary home (main residence), it’s generally exempt from CGT. To qualify:
- The property must be your main residence.
- It must not produce income (e.g., rental income).
Partial Exemption: If you rent out a part of your home or use it for business purposes, only that portion of the property is subject to CGT.
- Temporary Absence Rule
You can treat a former main residence as CGT-exempt for a period after you move out:
- Up to 6 years if the property is rented out.
- Indefinitely if no income is generated.
If you move back into the property, the 6-year exemption resets. However, you can only claim this rule on one property at a time.
- Investing Through Superannuation
Self-managed superannuation funds (SMSFs) enjoy reduced CGT rates:
- 33% discount on capital gains.
- 15% tax rate on gains, reducing the effective CGT rate to 10%.
When assets in an SMSF are used to start a retirement pension, both income and capital gains are completely tax-free.
- Timing of Sale
CGT is calculated based on your income tax bracket during the financial year you sell the property. If you anticipate a lower income next year, delaying the sale could reduce your CGT liability.
- Partial Exemptions
- 50% Discount: If you hold the property for more than 12 months, you’re eligible for a 50% CGT discount (except companies and foreign residents).
- Business-Use Reduction: If your home and business share the premises, the CGT exemption applies to the portion used as your main residence.
- Affordable Housing: A 60% reduction in CGT applies for investments in eligible affordable housing.
- Offsetting Losses: Capital losses can be used to offset capital gains.
Other Key Points About CGT
When Is CGT Payable?
You pay CGT when you sell an asset, not when you own it. If you make a profit on the sale, CGT is calculated at your marginal income tax rate.
How to Calculate CGT on a Property
To calculate CGT:
- Subtract the purchase price and associated costs (e.g., stamp duty, legal fees) from the sale price.
- Apply any applicable discounts or exemptions.
- Calculate the CGT based on your income tax rate.
For properties held for more than 12 months, most individuals qualify for the 50% CGT discount.
CGT Rates in Australia
CGT is charged at your marginal tax rate. For example:
- If your taxable income is $80,000 and you make a $50,000 capital gain, your CGT will be approximately $8,000.
- If your taxable income is $200,000 with the same gain, your CGT will be approximately $11,750.
Inherited Properties
Generally, CGT does not apply when inheriting a property. However, if the inherited property is sold and is not your main residence, CGT may apply.
Transferred or Gifted Properties
If you gift or transfer a property, CGT may apply based on its market value—not the gifted amount—unless exemptions apply (e.g., divorce settlements).
Reducing or avoiding CGT requires careful planning and an understanding of tax laws. Always consult a qualified accountant or tax professional to determine your eligibility for exemptions and ensure compliance.