How to Avoid Capital Gains Tax When Selling Investment Property Australia

You’re about to sell your investment property in Australia, and getting a nice payout. Simple, right? Not so fast.

Just like with selling properties in the U.S. and elsewhere, you’ll need to deal with Capital Gains Tax.

So how can you avoid paying a portion of your net profits?

Join us as we look at how to avoid capital gains tax when selling investment property Australia!

Primary Residence Exemption

One great avenue for selling property tax-free is the the primary residence exemption. This exemption allows you to avoid paying CGT if the property you are selling is considered your main residence. To qualify, you must meet specific criteria that establish the property as your primary home.

To use the primary residence exemption, the property must be your main residence for the entire period you own it. You must live in the property and treat it as your home.

This means you need to stay in the property, use it for personal living, and ensure it’s the address you use for your postal mail and electoral roll. There should be no commercial activities conducted on the property that could disqualify it from being a primary residence.

One key advantage of the primary residence exemption is the flexibility it offers when you move. If you decide to sell your home, you can still qualify for the exemption even if you’ve moved out, as long as the property has been your primary residence.

If you need to relocate, you can rent out your property and still claim the primary residence exemption for up to six years, thanks to the six-year rule. This rule allows you to avoid CGT if you sell the property within six years of moving out, as long as it has been your main residence.

To convert an investment property into your primary residence, you need to move in and use it as your main home for at least three months before selling. This period can help establish the property as your primary residence. But you should be cautious and consult with a tax professional to ensure all criteria are met to avoid any CGT issues.

Using the Six-Year Rule

The next of our capital gains tax tips is the six-year rule. It allows you to treat your property as your primary residence for up to six years after moving out.

By using this rule, you can rent out your property and still avoid capital gains tax when you sell it. This can be especially helpful if you need to relocate for work or other reasons but plan to return to the property later.

To qualify for the six-year rule, the property must have been your primary residence before you moved out. This means you must have lived in the property and used it as your main home.

If you decide to rent out the property, the six-year rule allows you to continue claiming it as your primary residence for tax purposes. This way, you can avoid paying capital gains tax on any profit made from the sale, as long as you sell the property within six years.

If you decide to move back into the property at any point, the six-year period resets. This means you can move out again and still claim the primary residence exemption for another six years.

It’s important to keep detailed records of your living arrangements and the dates when you lived in and rented out the property. These records will help you prove your eligibility for the six-year rule if needed.

The six-year rule can also be combined with other strategies to minimize your tax liability. For example, if you have owned the property for a long time, you can use capital losses from other investments to offset any gains.

Timing Your Sale

Timing your sale can play a significant role in minimising capital gains tax when selling investment property in Australia. The time at which you sell your property can impact how much tax you pay. Holding onto your property for longer periods often brings tax benefits.

Selling a property within a year of purchasing it usually results in paying a higher tax rate on the capital gains. This is because the gain is added to your taxable income and taxed at your marginal rate.

If you hold the property for more than a year, you can benefit from a 50% discount on the capital gain, meaning only half of the profit is taxed. This discount can lead to substantial savings.

Market conditions are another factor to consider when timing your sale. Selling during a peak market can yield higher profits, but it may also lead to higher capital gains tax.

Conversely, selling during a downturn may result in lower profits, reducing your tax liability. Assessing the real estate market and economic trends can help you decide the best time to sell.

Other Strategies

Another strategy is to plan your sale in a year when your income is lower. Capital gains are added to your total taxable income, so selling in a low-income year can reduce your overall tax bracket.

For example, if you expect to retire or take a sabbatical, that year might be an optimal time to sell your investment property. Lower income years can help you stay in a lower tax bracket, thus paying less in capital gains tax.

It’s also a good idea to keep track of any legislative changes that might affect CGT. Tax laws can change, impacting how much you owe when you sell your property. Staying informed about these changes can help you make timely decisions to benefit from lower tax rates or avoid unfavourable conditions.

Consulting with a tax professional can provide personalised property tax advice based on your financial situation and the current market. They can help you determine the best time to sell your investment property.

Offsetting Capital Gains with Capital Losses

Offsetting capital gains with capital losses is a practical way to reduce your tax liability when selling investment property in Australia. This strategy involves using any losses you’ve incurred from other investments to lower the taxable amount of your capital gains.

Capital losses occur when you sell an asset for less than what you paid for it. These losses can be used to offset capital gains in the same financial year.

For instance, if you sold stocks at a loss and also sold an investment property at a gain, you can subtract the losses from the gains. This reduces the overall amount of gain that is subject to capital gains tax.

If your capital losses exceed your capital gains in a given year, you can carry forward the unused losses to future years. This means you can apply these losses against future capital gains until they are fully utilised. Keeping detailed records of your transactions and losses is essential to ensure you can accurately claim these offsets when needed.

To make the most of this strategy, review your investment portfolio regularly. Identifying underperforming assets and deciding when to sell them can help you generate capital losses that can be used to offset future gains.

This approach not only helps in managing taxes but also in making informed decisions about your investment portfolio. It’s important to consult with a tax professional to ensure you’re applying these rules correctly.

Investing in Superannuation

Investing in superannuation is a smart way to reduce your taxable income. And that means you also reduce your capital gains tax liability when selling investment property in Australia.

Superannuation, often called super, is a retirement savings programme where employers and individuals contribute funds to be used upon retirement. By contributing more to your super, you can lower your taxable income and benefit from significant tax advantages.

One of the main benefits of superannuation contributions is that they are taxed at a lower rate than your regular income. Contributions made through salary sacrifice are taxed at just 15%.

This is generally lower than the marginal tax rate for most people. This reduction in taxable income can be particularly useful in years when you are selling investment property and expecting a higher tax bill due to capital gains.

To take advantage of these benefits, you can make concessional (pre-tax) and non-concessional (after-tax) contributions to your super fund. Concessional contributions, such as those made through salary sacrifice, are limited to $27,500 per financial year.

Non-Concessional Contributions

Non-concessional contributions, which come from your post-tax income, have a higher cap of $110,000 per financial year. But there are bring-forward rules that allow you to contribute up to three years’ worth of non-concessional contributions in a single year, providing even more opportunities to reduce your taxable income.

If you are close to retirement age, the benefits of contributing to superannuation become even more significant. Once you reach 60 and meet certain conditions, withdrawals from your super fund are generally tax-free. This means that any investment gains realised within your super fund are not subject to capital gains tax, providing a substantial tax saving.

Superannuation contributions can also help you manage the timing of your property sale. By making significant contributions in the same financial year as your property sale, you can offset the increased income from the capital gain.

This strategic use of superannuation contributions can help you stay within lower tax brackets and reduce the overall amount of tax you pay.

Small Business CGT Concessions

Small business capital gains tax (CGT) concessions offer another way to reduce your tax liability. These concessions are available to small business owners and can provide substantial tax savings if you meet the criteria.

There are several types of small business CGT concessions available. The first is the 15-year exemption.

If you’ve owned the property for at least 15 years and are over 55 years old and retiring, you may be exempt from CGT. This concession allows you to sell your property without paying any CGT, which can be a significant financial benefit.

Another concession is the 50% active asset reduction. This allows you to reduce the capital gain on your property by 50%, similar to the general 50% discount for individuals.

To qualify, the property must be an active asset used in your business. It can be used alongside other concessions to further lower your CGT liability.

The retirement exemption is another valuable concession. It allows you to disregard up to $500,000 of capital gains if you’re retiring and using the proceeds to fund your retirement. This concession can be particularly useful for business owners looking to transition out of their business and into retirement.

The rollover concession lets you defer the capital gain if you reinvest the proceeds into a new business asset. This can be beneficial if you’re selling one property to purchase another for your business. By deferring the gain, you can manage your tax liability more effectively and invest in the growth of your business without an immediate tax burden.

To qualify for these concessions, your business must meet certain criteria, such as having an aggregated turnover of less than $2 million.

Trusts

Holding property in a trust can provide significant tax advantages when selling investment property in Australia. Trusts are legal structures that allow you to manage and protect assets on behalf of beneficiaries.

By using a trust, you can reduce or even avoid capital gains tax, depending on the type of trust and how it is structured.

There are different types of trusts, including discretionary trusts, unit trusts, and hybrid trusts. Each type offers various benefits and is suited to different situations.

One of the main benefits of holding property in a trust is asset protection. Trusts can protect your property from creditors and legal claims, providing an additional layer of security. They can also offer estate planning benefits, as the property can be passed on to beneficiaries without the need for probate.