What is Capital Gains Tax and How Do You Avoid It?

Investing in property is a great way to supplement your income and build your asset portfolio, but when it comes time to sell, there are a few things to keep in mind. One of those things is Capital Gains Tax (CGT).

When you sell an asset like real estate, you make a capital gain or loss. This refers to how much profit or loss you make from selling. As part of your yearly tax return, you must report on any capital gains or losses and if you gained, you have to pay a levy. This is your CGT.

How is capital gain calculated?

CGT is calculated based on the profit you make on your asset. In many cases, the additional income will put you into the next tax bracket and you will therefore be taxed more overall for the year. Several factors could reduce the amount of capital gain. For example, if you held the property for more than 12 months, the gain will get a 50 per cent discount.

How can you avoid it?

There are a few ways to avoid or reduce your CGT. The main options to do this include:

1. Selling at the right time
2. Owner occupier exemption
3. Temporary absence rule
4. Investing in super

Selling at the right time

This strategy requires selling when your income is lower, separate from the property sale. By selling during a financial year when you know you will receive a lower income, you also lower your marginal tax rate, therefore reducing your CGT

Owner occupier exemption

Perhaps one of the most common ways to avoid CGT is to use the property as your main residence. This isn’t always possible but if the investment is meant to be your home, with the intention of using it as an investment for purchasing something else in the future, this could be a great solution.

Temporary absence rule

This goes alongside the main residence exemption above, referring to a situation where the investment property is your main residence, which you then move out of. The residence can be treated as your main residence for up to six years if you initially bought it as your main residence then later rented it out. If you move back within this initial six year period, the six years are reset.

Invest in super

Self-managed super funds attract a discount of just one-third for CGT, but as the standard tax rate for funds is 15 per cent, the maximum CGT rate then sits at 10 per cent, which is still much lower than most people’s marginal tax rate.

Capital Gains Tax shouldn’t be taken lightly if you plan to enter the property market as an investor. Always seek professional advice for the best outcome. If you have questions or want to know what option is best for you, talk to the experts at Offset Property today.