If you invest in property, capital gains tax (CGT) will raise its head when you’re at your happiest – when you make a profit from the sale of a dwelling.
But there are a couple of ways to make healthy profits from real estate and avoid paying CGT. These include extending or renovating your home and then selling it (making use of the main residence exemption explained below), buying a property through your self managed super fund (SMSF), or renting out your home and then selling it.
If you don’t know already, real estate is exempt from capital gains tax if purchased before 20 September 1985.
Avoid CGT if it’s your main place of residence
You can avoid paying CGT if you sell a dwelling that’s considered you main place of residence. You can only ever have one main residence at any given time unless you’re selling your old main residence and buying another. In this case you’re entitled to an overlap period of six months as long as the new property will be your new main residence, you lived in the old property for at least three continuous months in the 12 months before you sold it and it wasn’t used to produce rent in this same 12 month period. The ATO doesn’t give an exact description of what constitutes a main residence, but gives the following points to consider:
- You and your family live in the dwelling.
- Your mail is delivered there.
- You have your personal belongings there.
- You’re registered to vote at the property’s address.
- You have connected a phone, gas and electricity to the property.
If you’ve lived in your home for the whole time you’ve owned it, haven’t rented it out either completely or to a lodger and the land is smaller than two hectares, you’ll get a full exemption on CGT when you sell. This is helpful if you plan to live the renovator’s life: selling your home, moving into another, renovating it and then selling the renovated property. And while you won’t make a rental income if you go down this path, all profits made from the renovation are exempt from CGT.
Avoid CGT when renting out your main place of residence
If you have to move out of your home for whatever reason and choose to rent it out, you may be exempt from some CGT liability under the ‘Temporary Absence Rule’.
What is the rule? If you move out of your home and rent it out, under the law, the property is still treated as your principal residence for a period of up to six years. If you sell the property within this time from you will be exempt from paying CGT if you profit from the sale. You are also exempt from paying capital gains on the income generated from the leasing of the property.
What’s the catch? You will still need to pay CGT on the sale of one of your dwellings.
If you’re moving out of your home and renting it out, you’re going to need somewhere else to live. You will need to elect one of the two dwellings as your principle place of residence and a tax will be applied to the sale of your non-primary property.
Partial CGT exemptions
While avoiding CGT liability altogether may not be possible if you haven’t lived in the property before you rented it out, you can still generally apply for partial exemptions in some circumstances.
You bought a property with the intention of renting it out, but later changed your mind and moved in. If you changed your mind and decided to live in the property you purchased rather than rent it, you’ll be partially exempt from paying some capital gains tax. In this case, the CGT you’ll owe will be worked out by comparing the number of days you lived in the property to the number of days you rented the property.
Avoid CGT by buying a property through your self-managed super fund (SMSF)
Buying a property through your SMSF is one way you can generate profits from residential real estate for when you retire and avoid paying CGT all in one hit. You use your super fund to purchase the home along with an SMSF property home loan to make up the total. This is then paid off through your super contributions.
If you sell the property once you’ve retired, you’ll pay no capital gains on the property and even if you sell the property while you’re still accumulating your super, this will be taxed at a rate of only 15%. Holding onto the property for longer than a year will effectively drop this rate to 10%.
Buying a property with your SMSF comes with some risks, so you should never attempt it without first seeking professional advice. If you can only afford to buy one property with your super fund then you’ll have a lack of diversification. If you need to sell your property during your pension phase and the property market isn’t performing, you may end up making small capital gains or in rare cases losing out.
Through doing your due diligence you can still invest in property and generate rental returns and capital gains without attracting huge taxes. By focusing on your main place of residency and the temporary absence rule as well as buying property through your SMSF, you can manage to dodge hefty CGT charges. Remember this is general advice, so always seek professional advice before undertaking any of these suggestions.
Get professional advice about your capital gains tax issue
Capital gains tax is a complex area of Australian taxation law, so sometimes you might need an expert to help you deal with these matters.
Reference – https://www.finder.com.au/capital-gains-tax-selling-property
Need professional assistance with the sale of your property and Capital Gains Tax? Call Bottrell Business Consultants on 1300 788 491
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