How to minimise capital gains tax on an investment property

Capital gains tax can seem complex on the surface, but if you can grasp some fundamental concepts, it can help you to make both smart and tax-effective investment property decisions.

Capital gains tax (CGT) is a crucial concept for any property investor to understand. We'd like to share some strategies and insights on minimising the CGT you pay when selling an investment property.

 

What is capital gains tax?

CGT in Australia is a tax on the sale of certain types of assets, including investment properties. Investment properties differ from your residential home from a CGT perspective because the sale of residential homes is exempt from CGT.

If you sell your investment property and make a capital gain (i.e., a profit), then you will be liable for CGT. Your profit is the difference between the property’s selling price and what’s known as “the cost base” of your property. Your cost base includes:

  • The property’s purchase price, plus
  • Any costs you incur to hold or sell your property (like legal/conveyancing fees, real estate agent commission and stamp/transfer duty), minus
  • Any depreciation you’ve claimed while owning the property.


How do I calculate capital gains tax?

CGT rates on an investment property vary depending on whether the property is bought in your name, within a self-managed super fund (SMSF) or in a company name.

Let’s look at each scenario in turn.

  •  If you buy and sell an investment property in your own name or via a family trust, any capital gain will be added to your individual taxable income for that financial year and you will pay tax at your marginal rate less any applicable CGT discount (more on that a little later when we discuss how to minimise CGT).
  • If you buy and sell an investment property within your SMSF, any capital gain will be taxed at10% provided you have held the property for at least 12 months if you are in the accumulation phase. You won’t pay any CGT if your SMSF is in the pension phase.
  • If you buy and sell an investment property in a company name, any capital gain  will be taxed at 30%.

How to avoid capital gains tax

The simplest way to avoid CGT is to not sell your property. Australian investment properties in strategic locations have a long-term track record of capital growth, so it makes sense to hold onto good properties that are in high-growth, high-rental-yield areas.

The other way you can avoid CGT is by making a capital loss, which is obviously not ideal. However, you can reduce your CGT by offsetting any past capital losses you may have against any future capital gains that you make on your investment property.

CGT is only payable when you sell and make a capital gain.

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How to minimise capital gains tax

If you can’t avoid CGT completely, minimising it is the next best option. You can do that by:

  • Holding the property for at least 12 months after you buy it so that you can take advantage of the CGT discount that’s available (50%for individuals and family trusts, and 33% for SMSFs).
  • Taking advantage of CGT indexation if you bought your property before 21 September 1999 and it will reduce your CGT obligation by more than the CGT discount method outlined above. CGT indexation allows you to increase your cost base by the inflation rate between when you bought the property and 30 September 1999.
  • Buying a duplex with the intention of selling either one or both sides of it. You can minimise your CGT payable in this scenario by living on one side of the duplex and taking advantage of the residential CGT exemption for your side of the duplex. You may be liable for goods and services tax (GST) because this type of arrangement is treated as property development. You may need to register for GST in this scenario. It’s important to speak with your accountant to understand how a duplex development would impact the taxes you pay.

The bottom line

There’s an old saying that there are two things you can’t avoid in life —death and taxes. But you can avoid or minimise CGT if you make smart and tax-effective investment property decisions. It’s worthwhile getting professional advice.

How we can help

DPN’s property investment strategy for our clients is to buy high-quality, high-yield properties and to hold them for the long term. This strategy maximises both capital growth and rental returns while also minimising CGT.  

Our team at DPN can help you with all aspects of property finance, investment and ongoing management.

Contact us today to find out more.

The information provided is general in nature and should not be taken as advice. It does not consider your personal circumstances, needs or objectives. We recommend seeing your accountant to determine the best strategy for you. Taxation rates current at Nov 2023 and are subject to change.

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