When owning an investment property, there are a few tax-related matters to take note of. There are tax benefits that investors enjoy like depreciation allowances and tax deductions if your property is negatively geared. There is also Capital Gains Tax, or CGT, where your property is subject to tax when you decide to sell it.
Here we’ll offer some more detailed information about capital gains tax if you decide to sell your investment property in the future:
What is capital gains tax?
Usually, you will make a capital gain or a capital loss when you sell an asset like a property or shares. If your asset grew in value from the day you purchased it to the day you’re selling, the capital gain you received from selling the asset will be taxed. This tax is called capital gains tax.
In the matter of selling a property, you are required to pay CGT if the property is not considered as your primary home. Any kind of property you own will be taxed whether it is an investment property, vacant land, or a holiday home.
What are the exemptions?
CGT is exempted on your main residence and on assets acquired before CGT was introduced on September 20, 1985. If you lived in a property and also rented it out, you are still required to pay CGT for the time you were not the occupant.
A gifted property from a relative will not be exempted from capital gains tax. To calculate the capital gains tax of a gifted property, the value when the property was transferred or gifted will be considered as the sale price.
How much is your capital gains tax?
There are a variety of factors that will effect how much CGT you'll pay, including how long you have owned the property, what your marginal tax rate is, and if you have made a capital gain or loss.
Capital gain or capital loss is calculated by subtracting the selling price from the original value of the property when you first bought it and other associated costs like conveyancing fees, stamp duty, valuation report, building inspection and more. The result will be your capital gain or loss.
The length of ownership is relevant because if you have held the property for more than 12 months, you will get a 50% discount on CGT.
If you have owned the property for less than 12 months, you will pay full CGT on any capital gain you achieved. CGT will then be collected by the Australian Taxation Office (ATO).
It’s still best to get an understanding of your capital gains tax payable from your accountant before you sell your investment property.