Capital gains tax (CGT) is a deterrent for a lot of people thinking of investing in property or turning their owner-occupier into an investment property rather than selling it. But there are ways to minimise it and avoid it altogether if you have the right strategy.
How does it work?
CGT is a classic case of the government helping itself to a slice of your pie, even though you did all the baking. The more value growth you achieve on an investment property, the more tax you’ll have to pay.
Introduced in Australia in 1985, CGT applies to all investment assets acquired since that date, including real estate, shares, cryptocurrency and collectables.
If you sell an investment property or another asset, you will be subject to tax on a portion of the increase in value. The capital gain is added to your assessable income, where it can max out your tax bill.
So, say you buy a property for $500,000 and then sell it later for $800,000. Your capital gain is $300,000 and you will be taxed on that amount.
What’s the rate?
The gain you realise is added to your income in whatever year you sell the property (based on when you sign the contract, not when you settle), so the amount you pay will depend on how much you have earned that year and what you can deduct from that amount. There are free online CGT calculators that will help you figure out what you will pay.
It can also depend on how long you own the investment property. If you own it for longer than 12 months, you are eligible for a 50% discount on your capital gains…as in only half of the gains will be rolled into your assessable income.
If you flip and sell the property in less than one year, you have to pay the full amount. This discount was put in place to encourage investors to provide rental accommodation for longer
periods. If flipping and selling for a profit is your strategy, you can save thousands of dollars by renting the property out for a year before selling.
When don’t I have to pay?
CGT doesn’t apply to your principal place of residence (PPOR), only to investment properties, so if your family home has skyrocketed in value over the generations, you don’t need to worry. If you move out of your PPOR and turn it into an investment property, you remain exempt from CGT if you sell within the next six years. After that it becomes a regular investment property in the eyes of the taxman.
You are also exempt from CGT if you don’t make a capital gain. Say you sell your property for the same amount you bought it, or less, you don’t have any gains to tax.
Also, if you do sell one property for a loss, you can carry that amount into a future tax year so that when you sell another property for a gain, the previous loss is subtracted from the next year’s gains.
A tax on sharing
When the share economy was kicking off, a lot of people started renting out rooms or even their entire PPOR on air bnb to make some extra cash.
This has now opened them up to CGT on a portion of the gain they make on their family home in the future. The tax office was pretty lax on this at first, but so many people took advantage of short term rental returns during pandemic lockdowns when people could only
travel domestically, the ATO began to pay more attention. You can expect the ATO to get better and better at holding share economy landlords to account.
Buy and hold
Most b Invested investors have a buy and hold strategy, in which they create, release and use equity to expand their portfolio and eventually use increased rent to pay down the principal on their properties.
This strategy, if successful, can mean you find yourself one day with a portfolio full of unencumbered properties that are paying you enough income to live off and retire with. Those properties can be sold if needed to pay off other debts or free up capital, but the bottom line is that if you never sell, you’ll never have to pay CGT.