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How To Avoid Capital Gains Tax On Investment Properties?

 

While investing in real estate can be an exciting venture, it also comes with various financial considerations, including capital gains tax (CGT). In Australia, when you sell an investment property for a profit, you are subject to CGT. However, there are legitimate strategies and exemptions that can help you minimise or even avoid capital gains tax on investment properties. In this article, we'll go over some of these strategies and provide you with insights on how to optimise your real estate investments.

 

The 50% CGT Discount

 

One of the most significant tax benefits for Australian property investors is the 50% CGT discount. This discount is available to individuals and trusts who hold a property for at least 12 months before selling it. Essentially, it allows you to reduce the taxable portion of your capital gains by half.

For instance, if you made a $100 000 profit from selling an investment property, you'd only include $50 000 in your taxable income for that financial year effectively cutting your CGT liability in half.

 

Timing The Sale

 

Timing is crucial when it comes to minimising CGT. As mentioned earlier, the 50% CGT discount becomes available after holding the property for at least 12 months. Therefore, strategically timing your property sale can make a significant difference in your tax liability.

For example, if you've owned the property for 11 months and expect substantial gains, waiting another month to meet the 12-month ownership requirement can result in a 50% reduction in your CGT liability.

 

Primary Residence Exemption

 

The primary residence exemption can be a powerful tool for reducing or eliminating CGT on an investment property. Under this exemption, if the property was your primary residence at any point during your ownership, you may be eligible for a full or partial exemption on the capital gains.

To qualify for the full exemption, the property must have been your primary residence for the entire ownership period. If you didn't reside in the property for the entire period, you may still be eligible for a partial exemption based on the proportion of time it was your primary residence.

 

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Capital Improvements

 

Another strategy to minimise CGT is to factor in capital improvements when calculating your property's cost base. Capital improvements are expenses incurred to increase the property's value such as renovations, extensions or significant repairs. These expenses can be added to your property's purchase price to determine the cost base for CGT calculations.

By increasing your property's cost base, you effectively reduce the taxable capital gain when you sell it. Make sure to keep accurate records of all capital improvement expenses to support your claims.

 

Offset Capital Gains With Capital Losses

 

If you have multiple investment properties, you can offset capital gains on one property with capital losses on another. This strategy can help you reduce your overall CGT liability.

For instance, if you made a $50 000 profit on one property but incurred a $30 000 capital loss on another, you'd only need to pay CGT on the net gain of $20 000.

 

Small Business CGT Concessions

 

If you're a small business owner, you may be eligible for specific CGT concessions when selling an investment property. The Small Business CGT Concessions can provide substantial tax benefits to those who qualify.

To be eligible, you generally need to meet specific ownership and income requirements related to your small business. The concessions can allow for a complete or partial CGT exemption on the sale of a property used in your small business.

 

Holding The Property In A Self-Managed Super Fund (SMSF)

 

Holding an investment property within a Self-Managed Super Fund (SMSF) can be a tax-efficient strategy. While there are strict rules governing SMSFs, they offer unique tax benefits including potentially lower CGT rates and the ability to access your superannuation funds tax-free in retirement.

It's crucial to seek professional advice when considering this strategy, as SMSFs come with complex regulations and compliance requirements.

 

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Minimising capital gains tax on investment properties requires careful planning and adherence to tax regulations. The strategies mentioned above can all play a role in reducing your tax liability. It's essential to remember that tax laws are subject to change and your individual circumstances may vary. 

Therefore, consulting with a qualified tax professional or accountant is highly recommended. They can assist you in staying compliant with tax laws and make sure you’re taking full advantage of available opportunities. 

 

Buying off the plan property can be a daunting process, but there’s an easier way. iBuyNew is your all in one solution that supports you at every stage, from search to settlement. 

We take the pressure off you by doing the research, shortlisting the best properties that suit your needs, connect you to excellent brokers and conveyancers and keep you updated throughout the construction process, all the way until you get your keys. Book a FREE discovery call today or call 1300 123 463.

Published on 8th of September 2023 by Davina Deluao
Davina Deluao
Davina Deluao

Davina graduated from Swinburne University in 2018 with a Bachelor of Arts, majoring in Journalism. Through travelling and studying abroad in NYC and LA, her interests in property and design grew and became a strong pursuit. Davina has been writing for iBuildNew Group since 2019.

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