Capital Gains Tax on Investment Property in Australia

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Investing is often intertwined with capital gains taxes. Knowing how to manage your capital gains tax on investment property is vital for managing your investment projects.

What are capital gains on investment property?

Capital gains on investment property are a surplus you obtain when you sell your property for a larger money sum than you purchased it.

It can be calculated this way:

Capital gains of investment property: The selling price – the original cost of the property + associated expenses

What is capital gains tax in Australia?

Residents in Australia are obliged to pay capital gain tax on investment properties. Capital gains tax is what you owe the government when you sell an asset for more than you paid for it. While specific rules add a bit of complexity, if you buy an asset such as a house, hold it for a period of time, and then sell it for a profit later, the difference between the purchase price and sale price is taxable.

Capital gains tax can be regarded as a fee you pay on a profit you make by selling an investment property.

What is capital loss on property?

Sometimes, due to market conditions, one may have to sell an asset for less than the purchase price. This is called a capital loss. Capital losses can be subtracted from capital gains to lower the tax burden.

Capital losses in excess of your capital gains cannot be subtracted from your income, they can only be subtracted from your other capital gains.

Capital loss on investment property occurs when a real estate decreases its value, and that property needs to be sold for a lower price than the original purchase price.

How to calculate capital gains tax on investment property in Australia?

In Australia, capital gains simply get added to your assessable income. The capital gains are then taxed at the same rate as your assessable income.

The basic formula for calculating the capital gain taxes is:

The Selling Price – The Purchasing Price – Associated Commissions and Fees

Also, you can calculate your capital gain tax if you take into account your annual salary.

For example, if your annual salary is $AUD 65,000, and your capital gain is $AUD 30,000. Your total assessable income will be $AUD 95,000. Once you calculated your assessable income, check ATO‘s calculations on resident tax rates for individuals.

If you have purchased and sold an investment property within 12 months, your capital gain will be calculated and taxed for that year.

How to calculate the cost basis of investment property?

It’s important to calculate the cost basis of an investment property since it directly impacts your capital gains tax. Here’s what is included in the cost basis of the property:

original costs of the property – the total amount of cash or loan you paid for the property
Cost related to the acquisition of the property – some additional costs necessary for obtaining a property, such as the settlement costs, insurance, survey, transfer fees and taxes.
Cost of property improvement – costs that include any investments you made on a property, such as the new roof, remodelling or adaptations.

What costs can you claim as tax-deductible?

The tax deduction you can claim on your investment property is usually related to costs that originate from renting, repair, management, maintenance, council cost reports, land tax, property or assets depreciation, or loan interest costs. Some of the costs you can claim on your property that is tax-deductible are:

rent advertisements
council fees
land tax
pest control
insurance
necessary repairs
property maintenance
legal expenses
interest expenses

Capital gains property tax deductions in Australia

If you have owned a property for more than 12 months, you can use two different methods of calculating the CGT – discount and indexation.

The Discount Method

If you’re an Australian resident who has held a property for longer than one year, the taxable capital gains are reduced by 50%.

The Indexation Method

This method applies to Australian residents who purchased a property before 21st September 1999. This method considers inflation and tailors the net capital gain based on the assumed worth of your property in today’s property market.

Capital gains tax rate Australia

The capital gains tax rate is different for companies and individuals in Australia. Companies are not eligible for any capital gain tax discounts, and they pay, so the rate they pay is 30%. However, individuals’ capital gains tax rate calculates differently, and it is usually equal to the income tax rate.

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When do you pay capital gains tax on an investment property?

Your capital gains tax gets filed every year and is part of your income taxes. Capital losses can be carried forward indefinitely if they exceed capital gains in any given year.

The capital gains tax occurs when you sign the selling contract and transfer the ownership of the property to someone else. Therefore, the capital gain tax occurs when you sell your property in the same financial year.

For legal purposes, the selling records need to be kept for 5 years after the capital gain tax occurred.

Is stamp duty tax deductible?

Stamp duty is not tax-deductible, but is included in the cost base when purchasing a property. That means it can help reduce capital tax gains once an owner decides to sell the property for profit.

Capital gains tax exemptions in Australia

There are several ways available to exempt your capital gains from being taxed.

Main residence exemption

One way is called the main residence exemption. If the asset has been your main residence, it is not subject to the tax. If you have been also using the property to earn an income, you may not be able to use all of the exemptions. Let’s say you have been renting out a room, you would still have to pay some capital gains tax.

Six-year rule

The temporary absence rule can also be used to exempt property from capital gains tax if it has been rented out for income. If a property was originally the main residence, then rented out, you can move back into it within six years and still classify it as your main residence for tax purposes.

Six months rule

This exemption applies to a situation when a property owner has more than one place of residence within six months.

50 per cent rule

If a property owner has owned an investment property for more than 12 months, he can claim a 50% discount on capital gain tax.

How to avoid capital gains tax on an investment property?

Property owners are often curious about how to minimise or avoid capital gain tax. Here are some strategies.

Tax loss harvesting Australia

There are several strategies available to minimise capital gains tax on an investment property. One strategy is called tax loss harvesting. Let’s say you sold an asset for a large profit and will owe capital gains tax on it. If you own another asset that has decreased in value, you can sell that at a loss right before the end of the year and use that capital loss to offset your gain. Sometimes the asset can be repurchased again immediately after the new year.

Other strategies that can be applied are:

Keeping an asset for more than 12 months as an individual – if you hold your property for more than 12 months, you can apply either the CGT discount method or the indexation method to reduce the capital gains tax.
Reevaluation of your property before renting it – use the capital gains tax valuation report to help identify the capital increase or decrease of your asset.
Increasing your property cost base – the cost of acquiring, holding and disposing of a property, and it’s deducted from the selling price of the property. It can include costs such as renovations, loan application fees, etc.
consulting a tax professional – always seek out professional advice if you’re unsure what would be the best option for you
Note the date of purchase – if your property was acquired before 20 September 1985, it is automatically exempted from the capital gains tax.
Sell during a low-income year – if you can anticipate that your income will be lower in the following year, you can wait until then to sell your property and reduce your CGT.
Use the temporary absence rule – if you use your property for rent and don’t live there, you get an allowance from ATO to treat it as your main residence for 6 years and get a partial exemption.

Are gifts subject to capital gains tax?

Gifts can also be subject to capital gains tax. When a gift is given, the giver must pay taxes on the difference between the purchase price and the current market price. The receiver then uses the current market price as the cost basis in case they ever sell it and must calculate their own capital gains tax.

Book your consultation today

There is a lot of nuance to capital gains tax law in Australia, a tax professional should be counted on to both file your taxes, and also help you plan ahead to avoid or lessen capital gains taxes on future transactions.

If you’re unsure how to proceed with a possible investment and have difficulties calculating your capital gains tax, book your consultation today with us. We’ve been in the industry for more than 20 years, and we’re glad to help you with our expertise.