Understanding Capital Gains Tax and How it Affects Home Buyers

  • Posted 03 Dec
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Understanding Capital Gains Tax and How it Affects Home Buyers

If you’re a property investor or you’re looking to sell your family home, you’re probably looking forward to making a good profit, particularly if you’ve held the property for over 10 years.

What you might not know is that you may be required to pay Capital Gains Tax to the government. There goes that nice profit you were looking forward to… or is there a way around it?

 

Capital Gains Tax Explained

Simply put, CGT is required to be paid when you’ve made a profit or loss on an asset you’ve sold.

If you’ve made a gain, then it’s called a capital gain, if you make a loss, it is called a capital loss, and it’s the difference between what the house cost you to purchase and what you got for it when you sold it.

If it’s a loss, you’ll receive a tax return, but if you’ve made a gain, then you’ll be required to pay the CGT. But there are ways you can minimise this.

 

Minimising Capital Gains Tax

There are many ways that you can reduce the amount of CGT that you pay, which is why it’s important that you chat with an accountant familiar with property investing before you submit your tax return. You want to make sure you haven’t missed anything.

Here’s some ways that you can reduce your capital gains tax:

  1. When you’re working out the cost of your property, make sure you include the purchase price, market value plus all incidental costs. This would include stamp duty, legal fees, agent fees, rates, land tax, maintenance and your home loan interest. If you’ve done renovations (but didn’t claim a tax deduction) you should include those too.
  2. Once you’ve got that figure, you’ll need to minus any government grants you received, like the First Home Owners Grant, as well as any depreciable items. The ATO website has an extensive list of what you can and can’t include in the cost.
  3. If you purchased the property prior to 20 September 1985, you can reduce your CGT, provided no renovations have been made.
  4. If you’ve owned the property for longer than 12 months (which you should have), then your CGT can generally be discounted by 50%.
  5. You could be eligible for a full exemption if the home was your main residence for a large period of time.
  6. If you’ve used your Self-Managed Super Fund to purchase the property and you’re now looking to sell it after you’ve retired, then you wouldn’t pay any CGT. If you sell it while you’re still working, you’d received a reduced tax amount.

These are just some of the ways that your CGT could be reduced. And if you receive a full exemption, then any capital gain or loss is not applicable.

The amount you would have to pay is largely dependent on the tax rate you fall under. If you have a capital gain, it’s added to your income statement for the current financial year, and then you’ll be taxed at the appropriate marginal tax rate.

A capital loss can’t be deduced from your actual taxable income, but it can be used to offset against any other capital gains you may have had in that financial year. If you hold no other assets, it’s simply carried forward into the next year.

Capital Gains Tax is a bit of a mine-field, which is why you should always seek professional advice from someone who knows what they are talking about. You should have a property tax expert on hand when you need to file a tax return with CGT.

If you’re thinking about purchasing your first home or looking at investment properties, chat to the team at Australian Credit and Finance about your mortgage finance options today.

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