Capital Gains Tax can be the bane of investing in property, but there are ways to reduce what you pay (or avoid it altogether).
Those of you who’ve ever sold an investment property will know that Capital Gains Tax (GGT) can eat into your profit reducing what would have been an otherwise healthy investment. But what is it exactly and can you avoid paying it?
According to John Riley, Managing Partner of accounting firm JLR Partners in Melbourne,
“A capital gain or capital loss on an asset is the difference between what it cost you and what you receive when you sell it. Capital Gains Tax (CGT) applies to any profit you make on the sale of property with the exception of your principal place of residence (PPOR). In calculating a capital gain on the sale of a property, you’re able to claim the cost of associated transaction costs such as agent fees, conveyancing and stamp duty in addition to the original purchase value.”
How can you reduce or avoid paying Capital Gains Tax?
Search the internet and you’ll quickly find a variety of strategies to reduce what you pay in CGT - some of them complicated and far-fetched. Riley singles out what he claims are the three most effective strategies when it comes to reducing CGT:
1. Live in your property before you rent it out
Your principal place of residence (PPOR) is exempt from CGT. So, you can live in your property then let someone else live in the same property, and still claim it as your principal place of residence for up to six years. By claiming the property as your home, even for the period that it’s rented, you’ll reduce or even eliminate CGT.
2. Buy a property using the right tax structure
Purchasing a property in a discretionary trust can make a significant difference to the amount of CGT you pay. A discretionary trust provides the flexibility of allocating the capital gains to a number of different people. The beauty of this method is the capital gains can be allocated to the individual with the lowest tax rate.
Similarly, buying a property in a self managed super fund can result in capital gains being taxed at just 15% for an accumulation fund or 0% for a pension fund.
3. Put your profits into superannuation
When you sell your property, consider putting part (or all) of the profit into your own super account. Similar to salary sacrificing, this reduces the amount of tax you pay.
In the current financial year (and depending on your age) a taxpayer can contribute a maximum of $30,000 or $35,000 to super. By claiming the contributions as a tax deduction, you’ll reduce the amount of CGT you pay and improve your retirement savings.
Advice relevant as of 2017. The tax regulations around CGT may have changed since this article was published.