Capital gain tax has become one of the biggest concerns among property owners looking to sell their investment property.
While CGT is an inevitable selling process that one can’t run away from, there are ways to reduce it or even end up not paying it completely.
How to avoid paying CGT when selling an investment property
Below is a guide you can follow to ensure that you have potentially reduced your CGT liability when selling an investment property:
1. Take advantage of the primary residence exemption.
If you are selling your primary home, you will not need to pay capital gain tax, provided you meet the conditions.
But this may be acceptable if the property had been your main residence for the entire period you owned it.
If, in the case, you had rented out some part of the property, you will be required to pay a certain portion of the capital gain tax taxable for it.
If you want to be exempted from paying for CGT, you must have clear records and documentation to show proof of the period you’ve lived on the property.
2. Consider the Timing of the Sale
Holding on to your property for a significant period can allow you to qualify for discounts or reduced CGT rates.
In addition, having several investment properties in different financial years might lower your overall tax liability, especially if you qualify for certain exemptions based on annual income.
3. Utilize capital improvements
When making capital improvements to investment properties, the costs incurred to improve the property can be deducted from your capital gain when calculating CGT.
This means that if you make substantial movements, the costs of improving your property will help lower your taxable gain.
However, for this to happen, you must have all the receipts to provide to the Australian tax authorities.
4. Offset gains with losses.
If your other investments experience losses, you may be able to offset the gains from selling your investment property by utilizing the losses, which is also known as tax-loss harvesting.
Selling other properties or investments at a loss will open you to an opportunity to apply for losses against your capital gains, leading to a reduction in the CGT amount owed.
5. Use a trust or self-managed superannuation fund.
Another way you can reduce CGT is by selling your investment property through a trust or SMSF. This strategy can be used if you are seeking a long-term investor.
6. Consider spreading the sale over multiple tax years.
If your gains from selling an investment property are substantial, consider spreading the sale over two or more tax years.
You may reduce your overall CGT because smaller gains bring less tax liability.
However, you should note that this is only applicable if you are selling multiple properties or if you have a choice of when to sell them.
7. Gift the property.
Another option is to gift the property to family members in a lower tax bracket or those who can benefit from the primary residence exemption.
However, depending on the jurisdiction, it’s important to fully understand the implications of gifting properties as it may also trigger CGT.
8. Keep good records
Maintain a good and accurate record of your investment property so that you can use it to minimize CGT.
All documentation, including purchase and sales agreements, receipts for any renovations and improvements, and other documents, should be kept ready.
Keeping your records well means you can calculate your capital gain and take full advantage of any allowable deductions or exemptions when filing taxes.
