How To Minimise Capital Gain Tax On Investment Property – Everything You Need To Know!

When you sell an investment property in Australia, you might have to pay capital gains tax (CGT) on the profit.

But did you know there are ways to reduce this tax?

If you’re thinking about selling an investment property, it’s important to understand how to minimise the amount of capital gains tax you pay.

This blog will explain everything you need to know about minimising capital gains tax on investment property in Australia.

What Is Capital Gain Tax?

So let’s understand this term with an example.

Imagine you buy a property for $500,000 and sell it five years later for $700,000. You’ve made a capital gain of $200,000! But unfortunately, the Australian Taxation Office (ATO) wants a cut of that profit. This is where CGT comes in.

CGT is a tax you pay on the profit you make when you sell an asset, such as an investment property. It’s important to note that you only pay CGT when you sell the property, not when you buy it.

How To Avoid Paying Capital Gains Tax?

There’s no magic trick, but there are ways to reduce your CGT bill or avoid it altogether.

Let’s look at some ways you can do this:

1) Turn Your Investment Property Into Your Main Residence

This is a powerful strategy, but it comes with some rules. If you live in the property for at least 12 months and it’s your main place of residence, you generally won’t pay capital gains tax when you sell it. This is because you get a full exemption under the main residence exemption.

What Exactly Is A Main Residence?

Here’s what the ATO considers your main residence:

The place you live most of the time
Where you have your furniture and belongings
Where you receive your mail
Where you’re registered to vote
The address listed for utilities like electricity and water

Can You Use This For An Investment Property?

In some cases, yes! Here are three golden rules to remember:

Act Quickly: Ideally, you should live in the property as soon as you buy it. If you rent it out straight away, you won’t qualify for the main residence exemption under the six-year rule.
Temporary Moves: If you need to move out for a short while, you can still claim the main residence exemption for up to six months, provided you meet certain conditions.
The Six-Year Rule: This is a golden rule for investors! Even if you move out and rent out the property, you can still treat it as your main residence for tax purposes for up to six years. This means you can potentially avoid CGT altogether!

2) Hold Onto Your Investment Property For Longer Than A Year

If you can’t qualify for the main residence exemption, there’s still a way to reduce your CGT bill. If you hold onto your investment property for more than 12 months before selling, you get a 50% capital gains tax discount! This means you only pay tax on half of your capital gain.

For example, if you sell your property for a $100,000 capital gain, you’ll only pay CGT on $50,000 with the discount.

3) Increase Your Cost Base

The cost base of your property is everything it costs you to buy and own it. When calculating your capital gain, this amount is subtracted from the selling price. So, the higher your cost base, the lower your capital gain and the less CGT you’ll pay.

Here are some things you can include in your cost base:

Purchase price
Stamp duty
Legal fees
Loan application fees
Renovations

Keep all your receipts and records for these expenses – they’ll be handy come tax time!

4) Sell During A Low-Income Year

If you know you’ll have a lower income in the next financial year, consider holding off on selling your property. This is because your marginal tax rate (the tax rate you pay on your income) is based on your total income for the year. By selling in a lower-income year, you may be taxed at a lower rate, reducing your overall CGT bill.

Take Advantage Of Property Investment Tax Breaks

Beyond just minimising CGT, there are also some helpful property investor tax deductions to be aware of, including:

Ability to claim interest on investment loans
Depreciation on fixtures/buildings
Property management fees
Maintenance costs
Council rates and charges

How Working With Qualified Tax Accountants Can Help?

Selling an investment property can be a big decision, and understanding how capital gains tax works is an important part of the process. Even if you’re not planning to sell right away, it’s a good idea to be familiar with your options.

Here at KPG Taxation, we have a team of experienced accountants who can help you develop strategies to minimise your capital gains tax liability. We can help you understand the different exemptions and deductions that may apply to your situation, and we can also advise you on how to time the sale of your property to get the best possible tax outcome.

Don’t go it alone when it comes to capital gains tax. Contact KPG Taxation today for a free consultation. We’ll be happy to answer your questions and help you develop a plan to minimise your tax burden.

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