Strategies to Mitigate Capital Gains Tax When Selling Your Home
As a real estate agent, we are frequently asked by homeowners and investors about the tax implications of selling property.
One of the most common concerns is whether Capital Gains Tax (CGT) will apply when they sell.
So let’s break down what CGT is, when it applies, and how it can affect your property sale. It’s essential to consult with an accountant or the Australian Taxation Office (ATO) to understand your specific circumstances.
What is Capital Gains Tax (CGT)?
Capital Gains Tax (CGT) is the tax imposed by the Australian government on profits made from the sale of certain assets, including real estate.
CGT applies only to assets purchased after 20 September 1985. If your property was acquired before this date, CGT generally does not apply
The tax is calculated as the difference between the property's sale price and its purchase (and related) costs.
In property transactions, CGT is typically calculated based on the sale contract date, not the settlement date.
This means that even if the settlement occurs after the sale contract is signed, CGT will apply based on the contract date.
.
Do You Owe Capital Gains Tax on Your Home?
In many cases, you may be able to avoid paying CGT on your home. If you have lived in the property as your primary residence for the entire period of ownership, and it has not been used to generate income, you will generally be exempt from CGT when you sell. However, there are certain situations where CGT may apply:
-
Home office or business use: If part of your home was used to operate a business or as a home office, CGT may apply to that portion of the property.
-
Renting out your home: If you have rented out your property, CGT may apply on the portion of the property that was rented out.
The ATO specifies that the CGT exemption applies to properties that are 2 hectares or less in size, and the property must serve as your primary residence during the entire period of ownership.
Calculating Capital Gains Tax
CGT is not a separate tax but is incorporated into your income tax return. This means the capital gains you make will be added to your taxable income, and taxed at your marginal tax rate.
To estimate your CGT, subtract the property's original purchase price from the sale price. You can also include certain costs, such as:
-
Stamp duty
-
Conveyancing fees
-
Renovation and improvement costs (but not maintenance costs)
By keeping receipts for these expenses, you can reduce your capital gain, which in turn can lower your CGT liability.
Primary Residence Exemption
Your primary residence is generally exempt from CGT if:
-
You and your immediate family have lived there for the entire ownership period.
-
The property has not been used to generate income.
-
The property is no more than 2 hectares in size.
This exemption only applies to your main residence. If you have a second property or holiday home, different rules apply.
Investment Property
When you sell an investment property, CGT will generally apply. However, there are ways to reduce your CGT liability:
-
The 50% Discount: If you have owned the property for more than 12 months, you can access a 50% CGT discount on the capital gain.
-
Record all expenses: Keep receipts for all related costs, such as stamp duty, renovation expenses, and agent fees. These can be added to your cost base, which helps reduce your capital gain.
-
Depreciation deductions: If you’ve claimed depreciation deductions on your property, you’ll need to include these amounts in your CGT calculations.
Former Primary Residence Now Rented Out
If you once lived in a property as your primary residence and then rented it out, you may still qualify for CGT exemptions for up to six years after you move out, as long as the property hasn’t been used to generate income during that period.
If you move back into the property during this time, the six-year period resets.
Flipping Houses (Renovators)
If you buy, renovate, and sell properties for a profit (known as "flipping"), the 12-month ownership rule still applies for the 50% CGT discount. However, flipping properties may be viewed by the ATO as a business activity, which could change how CGT applies to your sale. It's important to seek professional advice if you are flipping properties to ensure you comply with all tax obligations.
Subdivided Properties
If you sell subdivided land, CGT applies to each individual title. If one of the blocks was your primary residence, you may still be eligible for the 50% CGT discount or possibly even avoid CGT altogether on the sale of that portion, provided it meets the criteria for a primary residence exemption.
As you can see, selling a property can have significant tax implications, but there are strategies to minimise the impact of CGT.
Every situation is unique, so it's essential to consult with an accountant or legal professional to ensure you understand the full tax consequences of your sale and to explore strategies to reduce your tax liability.