When you decide to sell your investment property, the profit you make from the sale (i.e. the difference in value between the time you bought the property and the time you sell it) is known as a capital gain. Whilst capital gains tax exemption is applied to personal assets such as the family home, capital gains are taxable when your investment property has been used for rent-producing purposes. In this case, the capital gain is added to your taxable income for the year and charged at the marginal rate. However, there are certain steps you can take as a property owner to minimise capital gains tax and maximise profit on the sale of your Perth rental.
Maximise your cost base
The amount of capital gains tax you need to pay is calculated by the value of your property at sale minus the property’s cost base. The cost base mainly comprises the initial price paid to purchase the property, but can also include additional costs such as capital expenditure (e.g. renovations), ownership costs and incidental costs such as stamp duty. Providing you haven’t already claimed these costs as tax deductions, you will be able to add these figures to your cost base to minimise the amount of capital gains tax you will have to pay upon sale of your investment property. You should therefore keep a record of any renovations or improvements made to your Perth rental that could be added to your cost base at the time of sale.
Hold your property for longer
A simple way to minimise capital gains tax on your investment property is to own it for over one year. If you have held your rental property for more than 12 months, you will be entitled to a 50% discount on capital gains tax when you decide to sell.
Use the property as your primary place of residence
Since personal assets are exempt from capital gains tax, you can avoid paying this tax on a property that is considered your primary place of residence (PPOR). However, unless you are selling your main residence to buy a new one, you can only hold one PPOR at any given time. This doesn’t particularly help investors with multiple rental properties, but can benefit those looking to buy, renovate and sell for a profit. In a situation where you’ve used a property as your primary place of residence before renting it out further along the line, you may still be partially exempt from capital gains tax. In this case, your tax will be calculated based on the time the property has been used for rent-producing purposes (i.e. as an investment).
The six year rule
In certain circumstances, it is still possible to use a property for rental purposes and (legally) avoid paying capital gains tax. When you’ve occupied a property as your main residence, the property could continue to qualify for exemption from capital gains tax for a period of up to six years. Providing you don’t nominate a second property as your PPOR during the six year period, you will be able to rent the property out and still be exempt from capital gains tax on your return.
For example: you’ve occupied your main residence for three years after investment, but you’ve had to move out temporarily due to a job transfer overseas. Providing you re-occupy (or sell) your property within the six year period, you could rent your residence out during your absence and still qualify for exemption. Once you’ve reoccupied the property, the ‘six year rule’ then resets, meaning you could actually rent it out again (for less than six years) and still maintain your exemption.
Note: this ‘six year rule’ applies to properties rented out after 20th August 1996.
Managing your rental properties
Managing multiple rental properties can be a stressful and time-consuming process. If you plan on making the most out of your property investment, you should consider enlisting the help of a property management team with a specialised knowledge of the Perth property market.
At Rentwest, our team of property management specialists have years of experience helping WA property investors manage their Perth rental properties. From rental collection to investment strategies, our Perth-based property managers can take the stress out of property investment and ensure your Perth rentals remain competitive in the current market.
Call the team on 08 9314 9888 or email Rentwest at firstname.lastname@example.org for more information on our property management solutions.