There are ways to keep more of your capital gains and paying less on tax.

The ABCs of the CGT

The capital gains tax: It’s the bane of any property investor’s existence. According to the Australian Taxation Office, more than $3 billion worth of capital gains tax was collected from individuals in 2012-13 alone, and a good portion of that was likely due to real estate.

When it comes to running a rental property, having an understanding of the capital gains tax is as important as hiring an investment property manager. Here is a primer to get you started.

Explaining the capital gains tax

The capital gains tax (CGT) was originally introduced on September 19, 1985, and today it makes up a significant portion of the government’s revenue. Contrary to popular belief, and what the name would suggest, the CGT is not actually a separate tax. Rather, it’s a part of the wider income tax.

The CGT is a tax that applies on any transaction where an asset is sold for a higher price than what it was originally bought for. In other words, imagine that you hire a buyers’ agent in Sydney and they find you a property for $700,000. Five years later, you sell that property for a price of $1 million, earning a $300,000 profit. This gain will be taxed.

What does CGT apply to?

The CGT doesn’t apply to all kinds of properties. If the reason you sought out the services of a property agent is to buy a residential home, then you’ll be happy to know that you won’t lose any profit you make to the CGT when you eventually sell it. This is because your family home, or ‘main residence’, is considered a personal asset, and so doesn’t count.

But there are some very specific conditions by which a property is considered your main residence. For instance:

  • You and your family must live in it
  • It’s the place where your mail is delivered to
  • Services like a phone line and electricity are connected to it
  • It contains your personal belongings

If you’ve only lived in it for part of the time, you’ve run a business out of it or rented it, and it sits on a land of more than two hectares, the property might only be partially exempted – or not at all. Keep this in mind before you make any decisions about your home.

Getting a discount

Everybody loves a good discount, and this is especially the case when it comes to the CGT. After all, it could be thousands of dollars that you’re saving.

If you hold an asset for a year or longer before selling it, and you’re an individual, you qualify for a 50 per cent discount on the CGT. It’s therefore in your interest to avoid quick-flipping your investment property and instead hold on to it for some time. This tends to be a wiser investment strategy in any case. The June 2015 RP Data Pain and Gain report found that homes tended to sell for more the longer they were owned.

Rollovers and losses

Of course, no real estate sale is a guaranteed success. There is also the chance that you might make a capital loss rather than a capital gain. What happens then?

While it would be nice to be able to claim the loss against your income, this is not possible. What you can do, however, is use that loss and deduct it from any other capital gain you make in the same year. In some cases, you can even use it to reduce capital gains in future years.

There is also what’s known as ‘rolling over’, or deferring, a capital gain until later, but it’s only under certain conditions. For instance, if your marriage breaks down and your property goes to your spouse, the CGT will be deferred until the next time you make a capital gain. The same goes if your property is destroyed or lost in some other way.

Now that you’re armed with what you need to know about CGT, you can feel confident when hiring a property buyers’ agent and beginning the hunt. Whether it’s a residential home or an investment property, you’ll know the rules.

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