Getting into the property investment market is a great long-term investment strategy that could see a significant return on investment.
However, there’s a small catch in the form of an investment property tax that occurs upon sale of an asset, or in this case your investment property. So, what is capital gains tax? How does it affect your investment? And is it possible to minimise its impact on your profit margin?
What is CGT and when does it apply?
Capital gains tax is a tax that is applied after the sale of a property and is calculated by the value of the property at the time of sale, minus its initial value and associated costs. For example, if you bought your investment property at $350,000 and sold it for $500,000, CGT would be calculated on the $150,000 sale profit, not the total sale price. It is important to note that CGT is actually part of your income tax and not a separate tax; this means when you make a capital gain, it is added to your total taxable income for that year. Providing you don’t make a loss on the sale of your property, this could significantly increase the amount of tax you are required to pay at the end of the financial year.
Does CGT affect my tax return?
Yes. All assets that you have acquired since CGT came into effect on 20 September 1985 will be taxed unless exempt. Whilst the tax isn’t applied directly to the ROI from the sale of your investment property, it will affect your total income and therefore the total tax you have to pay. For instance, if you earned $110,000 in the financial year, and sold your investment property for $150,000 profit minus expenses, your total taxable income would be $260,000. The increase in taxable income means you will move into the higher tax bracket and therefore be subject to high tax on the income. However, if you instead sold your investment property at a loss of $25,000 (known as a capital loss) your taxable income would be reduced to $85,000, moving you into the lower tax bracket.
How to minimise CGT
There are steps you can take to minimise the amount of capital gains tax you pay. If you live in your property for at least six months after purchase as your principal place of residence, you may be eligible for a full exemption from CGT. This is because it is seen as a residence rather than an investment. Another way of minimising the amount of CGT is known as the six-year rule. This applies to properties listed as your primary place of residence but leased out for up to six years.
Expert advice from Rentwest Solutions
Capital gains tax can be difficult to wrap your head around for first time and seasoned property investors alike. If you are struggling to understand the tax implications of investing in the Perth property market, the experienced team at Rentwest Solutions can help. Our team offer expert knowledge on the Perth real estate market and can help you better understand how capital gains tax will apply to your investment and how you can minimise it when it comes time to sell up. For more information on our property solution services, please get in touch on 9314 9888 or visit our website or contact us on [email protected]