Selling a rental property has certain costs too and it depends on how much you earn and how long you’ve owned the property, you are also subject to a substantial amount of capital gains tax (CGT) charges.
There is nothing wrong if you find ‘legal or acceptable’ means to avoid or at least reduce capital gains tax when selling an investment property. Talking to your accountant will help you identify certain courses of action.
Below are 5 things you can do to lower your capital gains tax.
Cost of Capital Gains Tax
Determine your assessable income for the year as this falls on a certain tax bracket. You can refer to the Australian Taxation Office (ATO) site for resident tax rates.
In case you fall under the highest tax bracket, your CGT can be as high as 45% on your property gain. Here’s the CGT Calculator so you’ll have an idea of how much it’s going to cost.
Schedule of CGT Payments
CGT is paid as you document your assessment form for the year you sell your property. For instance, in the event that you sell your property in September, you'll be subject to pay CGT the next July, when the financial year closes.
How to avoid capital gains tax in Australia
Be the owner-occupier to start with
If you want to be exempt from CGT, best to live in the property after acquiring it. This then can be listed as your Primary Place Of Residence (PPOR). In the event that you have rented the property out initially then decided to move in and live in it - you won’t be able to get the full CGT exemption but is subject to ‘partial exemption’, it will be computed as “years lived in“ vs. “years rented.”
Get the property reassessed before renting it out
Capital gain is equal to the final sale price minus the property value at the time it was rented. Get it appraised to get a new cost value from which to calculate any future gains.
Use an SMSF home loan
If you’re a member of a self-managed super fund, you can use it to purchase a house, together with a separate SMSF property home loan. Note that you’re not allowed to live in the home until you’re eligible to receive your pension. Please note there will be some paperwork such as a Bare Trust etc to buy a property in an SMSF but there will be long term benefits.
Once you’re a retiree, you can sell the property you’ve bought with your SMSF without having to pay capital gains tax. Again please confirm this with your financial adviser
Use exemptions like the 6-year rule
If you rent out your property for six years or less, you can use this to gain a full capital gains tax exemption, as long as you’re not treating another property as your main residence.
While this is commonly called the “6-year rule,” it doesn’t refer to six calendar years. It only refers to the time your property has an active tenant. So, for example, you rented out a property for eight years, but it stayed vacant for several months that add up to two years, you’re still eligible for this exemption.
The objective isn't simply to figure out how to maintain a strategic approach to capital gains tax when selling a property yet to do it inside the constraints of the law. With what we have provided as means, you can essentially decrease your capital gains tax legally. Keep in mind, you generally need to take care of your obligations, yet that doesn't mean you need to pay more than what you should.
It would be best to discuss this with your financial adviser or accountant as the information we provide is for general information only.
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