How To Reduce What You Get Taxed And Maximise Profits When Selling Investment Property

How To Reduce What You Get Taxed And Maximise Profits When Selling Investment Property

Read time: 3 minutes, 58 seconds.

A person doesn’t know how much he has to be thankful for until he has to pay taxes on it.” -Ann Landers

While that’s true, taxes are the last thing anyone ever wants to hear about. Especially when you’re trying to sell an investment property.

Taxation is different when selling an investment property versus your home. When it comes to taxes, capital gains tax or CGT is only applied to property that was used for income. So your investment property falls into that category.

In other words, you’ll get a capital gains tax on any profit made on the price you paid for the property. That profit is your capital gain. Now to figure out your capital gain, simply subtract the amount you paid for it from what you’re selling it for.

However, there are ways to reduce your CGT. You just need to qualify. So we’ll talk about how you can figure this out for yourself.

Bear in mind, though, the date the property was bought could automatically disqualify you from paying CGT. That’s because this specific tax was only introduced in 1985. So if your property was bought before the 20th of September, 1985, CGT simply doesn’t apply to you.

Your cost base

Your cost base is not just the amount that you agreed to pay for the property when you bought it. According to the ATO, your cost base also includes any costs that you acquired while preparing to buy. Think of otherwise miscellaneous fees like stamp duty fees and loan application fees. How much did the conveyancing cost you? All this can help.

In addition, include in your cost base any costs you incurred during the time you owned the property. So this means if you made any renovations to the building, you can include that in your cost base, too.

Only Sell after owning the property for atleast a year

It might be tempting to simply buy a piece of property and immediately flip it. While this is a great way to make a quick dollar, it can turn out to be quite costly in your taxes. 

Let’s say, for example, that you buy your property and resell it in under a year. You will have to pay the full capital gains tax amount. However, if you wait until after 12 months to sell the property, you will benefit from a 50% reduction in your CGT. 

Your Supperannuation Fund

Did you buy the property with your self-managed superannuation fund? Then you could qualify for no CGT amount once the sale happens during the pension stage. If, however, the property is sold during the accumulation stage, your CGT gets reduced by a third. 

Another way that you can use your superannuation fund to reduce your capital gains tax is by making a concessional contribution to your super. The total concessional contribution amount will be deducted from your total capital gains tax amount.

While getting a tax cut keeps money in your pocket, there has been some talk around reforming CGT rules for investment property. This has to do with curving the current affordability issues we face with first-time home buyers.

“Economists that have looked at the impact of the CGT concession, as it applies to housing, seem to say it does have an impact. It’s somewhere between 1% and 4%.” -Jason Falinski

The temporary Absence rule

So we know that CGT doesn’t apply if the property is your primary residence. Sometimes, though, it’s a case where the property used to be your primary residence. This can also help.

Even though you have moved out of the property, it can still be considered to be your home for up to 6 more years according to the ATO. The 6-year rule applies even if you start to use the property to generate income. Then, if the 6 years elapse and you are not yet ready to sell, you can temporarily move back into the property and get another 6 years of CGT protection.

Figuring out when to sell

When selling your property, it all boils down to timing. So if you want to make the most of your CGT, try to sell your investment property in a low-income year. 

Remember that your CGT is not just about your property, it has to do with your regular income, too. So if you choose a low-income year to sell, your CGT will automatically also be lower.

As you can see, there are many factors to consider, MLS Finance can work with you to plan out a strategic plan.  To stay in touch, please sign up to our newsletter.

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