Selling property can mean making a profit if you manage to sell for more than your purchase price. But, profits can trigger tax obligations. In this blog, we share our top tips on how to minimise or avoid capital gains tax on your investment property.
What is capital gains tax and how much is it?
Capital gains tax is a tax liability triggered by a realised capital gain on the sale of an asset. Generally speaking, capital gains tax is paid at your marginal tax rate, so the amount you pay will be dependent on your other income from the relevant tax year.
How to reduce or avoid capital gains tax:
To be clear, capital gains tax on property is only charged on capital gains from the sale of investment properties. If the property you’re selling is your principal place of residence (PPR), you won’t pay a cent in capital gains tax. If you’ve lived in the property as your PPR and rented it as an investment property at some point as well, this can make things more complicated. Speak to your accountant about how best to approach these types of capital gains.
Since your capital gains tax liability is paid at your marginal rate, you can avoid or reduce capital gains tax by selling your investment property during a low income year. An experienced accountant can help you leverage this type of tax planning among other strategies, to find the most favourable tax environment.
Wait for a year
A key factor in capital gains tax calculations is how long the asset has been held for. If you own the property for more than 12 months, you may be eligible for a 50% discount on the capital gains liability.
Offset capital losses
Capital losses can be used to offset capital gains, so if you anticipate triggering a capital gains event, consider planning to realise that capital gain in the same income year as a capital loss, to minimise your overall capital gains liability. Your accountant will be able to advise how best to approach capital gains and losses for the most favourable tax outcome.
An interesting way to minimise or avoid capital gains tax on an investment property is through a self managed superfund. Owning investment properties within an SMSF carries a suite of tax benefits, many of which apply to capital gains.
For SMSFs in the accumulation phase, a capital gain from an investment property would be taxed at the flat rate of 15%, as it’s treated the same as all other income within the fund. However, the 12 month ownership rule applies in the same way as non-SMSF-owned assets. If the fund holds the property for more than 12 months, a discount of one third is applied to the tax liability – meaning only 10% capital gains tax is paid. Compared with a marginal rate of up to 45% outside of an SMSF environment, this method can provide substantial savings.
For SMSFs in the retirement phase, however, all income is tax free, meaning realised capital gains on investment properties are not liable for capital gains tax.
Need support from accountants who understand how to help you avoid capital gains tax on your investment property? Contact National Accounts today.