Many property investors dread capital gains tax.
But a deeper understanding of what it is and how it works can help you to make tax-savvy decisions about your property investments.
What is capital gains tax?
A capital gain is the profit you make when you sell an asset for more than it cost you to acquire it. And capital gains tax (CGT) is the tax you pay on that profit.
Who pays it?
If you’ve made a profit selling an asset or investment, including an investment property, you might have to pay capital gains tax.
Capital gains tax may be payable on profits made from selling assets such as property, land or shares. It applies regardless of whether you purchased or inherited the asset.
It doesn’t, however, apply to any profits made from selling your primary residence. Only profits made from selling investment property or land might be subject to capital gains tax. Nor does it apply to assets acquired before 20 September 1985. It also generally doesn’t apply to any capital gains made from selling cars, personal use assets worth less than $10,000 or any prizes you might have won.
If you have made a capital gain from the sale of a shared asset, you’ll need to work out each owner’s individual interest in the asset. That will then determine each party’s individual capital gain.
When do you pay it?
Any capital gains you make need to be included as part of your personal income in your tax return in the year you sell your asset.
How much is it?
Although capital gains tax has its own name, it’s not actually a standalone tax. Because your capital gains are included in your personal income, the amount of tax you pay on them will be determined by what income bracket you fall into.
Because capital gains are included in your total income, any strategies that reduce your taxable income – such as making a tax-deductible super contribution – may help to reduce the amount of tax payable on your capital gains. Seek advice from your accountant about this.
A capital gains tax discount may apply if you owned the asset for more than a year before selling it. If you’re eligible for a CGT discount, you’re likely to only be taxed on half of your capital gain.
What about capital losses?
Just as you make a capital gain when you sell an asset at a profit, you make a capital loss when you sell an asset for less than it cost you to acquire it.
A capital loss may be used to reduce your capital gains in the year the loss occurs, or it may be carried forward to offset against future capital gains. This may reduce the tax you need to pay. There’s no time limit on how long you can carry forward a capital loss.
You need to keep records of every transaction, event or circumstance that is relevant to proving whether you’ve made a capital gain or loss from an asset for five years after you sell that asset. Again, your accountant is the best person to provide advice.
How do you calculate your capital gains?
To calculate your net capital gain, add up your capital gains over the financial year and subtract your capital losses (including any from previous years that haven’t yet been claimed) and any capital gains discounts you may be entitled to.
The information above is general, and you should seek advice that is specific to your own circumstances. For professional advice about tax-related matters, talk to a qualified accountant. And for expert advice about Perth property investment, get in touch with our specialist property management team.