As a property investor, capital gains tax is an unavoidable significant factor you need to consider. It impacts your financial decisions regardless of your age and experience in the property market.

Strategic planning to lessen Capital Gains Tax (CGT) plays a vital role in optimising investment returns and the preservation of wealth.

Property investors seek to generate income from property value appreciation or rental income. However, profiting from the sale of your investment property is considered a capital gain and must be reported on your income tax return.

This article provides 5 tips on how to lessen Capital Gains Tax on investment properties or reduce them for investors and retirees. We’ll focus on smart money management and maximising financial outcomes in property investments.

What is CGT and Can I Avoid It?

The difference between your property’s cost base (the amount you paid for the property) and your capital proceeds (what you get when you sell it or the market value when you sell it) is your capital gain.

You pay Capital Gains Tax (CGT) on the money you make when you sell an investment asset, like shares or real estate. Your marginal tax rate applies to capital gains.

“How can I avoid capital gains tax on investment property?” is a question most homeowners and property investors ask.

In Australia, you can’t completely avoid CGT because it’s part of your income tax. However, investors and retirees may use strategies to lessen its effects.

Strategy #1: Understand the Power of Long-Term Holding

Properties generally increase in value over time, and the longer you hold onto them, the higher the likelihood of benefiting from long-term capital growth, i.e. you could make more money selling the property after a longer holding period.

By holding a property for more than 12 months, you may qualify for a 50% capital gains tax discount on any profit from selling it.

Example: calculate capital gains tax

If you buy a property for $500,000 and the property sells for $800,000 after 10 years, the capital gain is $300,000. If your property qualifies for a 50% capital gains tax discount, your taxable capital gain would be $150,000 instead of $300,000, providing you with substantial tax savings.

Holding long-term investment properties allows you to pay CGT at a reduced rate and even provide a steady income for retirees with lower taxable income.

This CGT discount method advocates for a long-term investment approach, prioritising sustained growth, tax benefits, and enduring market fluctuations to maximise financial benefits.

Strategy #2: Utilise Capital Losses for Strategic Offsetting

The Australian Taxation Office (ATO) gives you the opportunity to use current financial year capital losses to reduce your net capital gain for the same financial year – you have the flexibility to decide which gains to deduct losses from to reduce your assessable income.

Start by deducting losses from gains not eligible for the capital gains tax discount to reduce CGT payable. You may also use carry-forward losses from previous years to offset current-year capital gains.

Example: Capital gains tax when selling rental property

Say you sell a rental property and realise a capital gain of $50,000. During the same tax year, you also experienced a capital loss of $20,000 from selling shares.

After offsetting the property gain with the share loss, the taxable capital gain is $30,000 ($50,000 – $20,000). This reduces taxes on your investment property sale.

Now, if you have no more capital gains to offset, these losses may reduce ordinary income by $3,000 per year. Excess losses over $3,000 may be carried forward to future tax years, providing an opportunity for tax planning and optimisation.

Strategy #3: Reduce Gains with an Optimised Cost Base

According to the Australian Taxation Office (ATO), your profit is the difference between the property’s selling price and the “cost base” of your property.

The cost base is the total cost of a Capital Gains Tax (CGT) asset. This includes the initial purchase price as well as other property-related expenses such as buying, holding, and selling the asset.

The extra costs include:

the money or property that is given for the asset,
any other costs that came up while acquiring the asset or related to the CGT event, such as legal fees and stamp duty
the costs of owning the asset,
capital costs to enhance or maintain the asset’s value, and
any depreciating assets associated with the property, which may impact the cost-base calculation

Common Costs That Are Overlooked

You may overlook several tax deductions when selling your investment property that could significantly impact your tax claims. Here are a few – but only if these have not been used as a deduction to offset income throughout the financial years:

Loan interest for buying or maintaining rental properties.
Borrowing expenses, such as fees related to obtaining property loans.
Property management fees you pay to professionals who manage your property.
Real estate advertising costs for attracting tenants or buyers can reduce your taxable income.

It is always wise to keep accurate records and receipts to support these deductions to ensure you maximise tax benefits for your investment property.

Strategy #4: Timing Your Sale for Tax Efficiency

If you want to get the most tax breaks from selling your home, it’s best to do it when your income is lower, like when you change careers or cut back on your hours.

Selling your home in years with lower income may result in reduced capital gains taxes, as they are taxed based on your total income.

In retirement, you have more control over when you receive income. This allows you to choose years that are more advantageous for selling property in terms of Capital Gains Tax (CGT).

By strategically timing the sale of your property to when you have a lower marginal tax rate, you may maximise the tax implications and potentially reduce the impact of CGT on your sale proceeds.

Strategy #5: Complex Exemptions for Maximising Savings

The main residence exemption and 6-year rule in Australia offer homeowners opportunities to reduce capital gains tax liability when selling an investment property.

The main residence exemption allows you to sell your property without paying Capital Gains Tax (CGT) if it has been your primary residence. The main residence exemption lasts for up to six years after moving out, as long as certain conditions are met.

The 6-year rule enables you to treat your property investment as your principal place of residence for tax purposes even if you’re not residing in it. The 6-year rule gives you a partial exemption from paying CGT upon sale. This rule is particularly beneficial for scenarios like temporary relocations for work or renting out the property while away.

These exemptions are highly individualised, and you should get professional financial advice to understand and comply with the rules. Your professional advice netowrk can help you maximise these exemptions, especially when downsizing or changing lifestyles.

Ready to Build an Investment Portfolio?

While you cannot avoid paying tax on capital gains, the strategies discussed can minimise it. A qualified financial planner and tax professional can help you optimise your CGT strategy to fit your personal situation and investment goals. By leveraging their expertise, you can work towards minimising tax liabilities while maximising future capital gains.

Property investing can be a simple and effective way to achieve financial goals, regardless of age or experience, with expert guidance and knowledge.

Need investment advice? Central Coast Financial Planning Group can work with you to tailor your investment plan and build your portfolio. Our financial advice team can help you establish direction for your investments to achieve your financial and lifestyle goals.

Call us or book online to secure your consultation today!

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