Capital gains tax (CGT) is a complex concept that can confuse even seasoned real estate investors. However, it significantly impacts the profits you pocket when selling property assets. If you plan to sell a home or land, you must have a clear idea about CGT and how it impacts your investment planning and portfolio management.
What is Capital Gains Tax?
Capital gains tax, or CGT, is the tax you pay on profits from selling an asset, such as property. The Australian Taxation Office (ATO) introduced CGT for assets acquired after 20 September 1985. You report capital gains and losses in your income tax return, and then you pay tax on your capital gains at your income tax rate. CGT isn’t a separate tax; instead, it’s added to your income tax, potentially increasing the amount of tax you need to pay and even pushing you into a higher tax bracket.
Do You Pay Capital Gains Tax When You Sell Your House?
Generally, if the property you sell is your main residence, you don’t have to pay CGT. However, there are exceptions. If you rented out part of your home, flipped it, or ran a business from it, you might need to pay CGT. According to the ATO, your home is exempt from CGT if it:
- Has been your and your dependents’ home for the entire period you owned it.
- Has not been used to produce income.
- Is on land of two hectares or less.
This is known as the ‘main residence exemption.’ If you don’t meet all these conditions, you might still be entitled to a partial exemption. The ATO provides a property exemption tool to help you calculate the exempt proportion of your property.
If you inherit a property and later sell it, you might be exempt from CGT. The ATO outlines the rules for this situation. Consulting a qualified tax advisor for specific advice is also a good idea.
What is My Main Residence?
Your main residence is your home. The ATO states a dwelling is generally considered your main residence if:
- You and your family live in it.
- Your personal belongings are there.
- Your mail is delivered there.
- It is your address on the electoral roll.
- Services like gas and power are connected.
Your property must have a dwelling, and you must have lived in it for it to be considered your main residence. This includes houses or apartments. If you build or renovate your home on land you own, the ATO allows you to treat it as your main residence for up to four years before you move in.
When you move homes, you can treat your new home as your main residence if you move in as soon as practicable. You can also treat your former home as your main residence for up to six months if it’s not yet sold. Additionally, under the ‘six-year rule,’ if you use your former home to produce income (such as renting it out), you can choose to treat it as your main residence for up to six years after you stop living in it.
How Can I Reduce Capital Gains Tax When Selling My Property?
If you owned the property for at least 12 months before selling it and are an Australian resident, you are generally eligible for a 50% discount on your capital gain, known as the capital gains tax (CGT) discount. However, if you used your home as a rental or business less than 12 months before selling it, you can’t use the discount.
Other ways to minimise CGT include planning your asset sales strategically and making use of any applicable exemptions. The ATO website provides detailed information, and consulting a professional for tailored advice is always beneficial.
Do You Pay Capital Gains Tax At Closing or Settlement?
You don’t pay CGT immediately after selling the property. The CGT event is triggered when you sign a contract to sell your property, but you pay the tax when you file your income tax at the end of the financial year. For example, if you sell the property in September, you will pay CGT in July of the following year. The date of sale is when you signed the contract, not when you settled.
How Long After I Sell My House Do I Have to Pay Capital Gains Tax?
You need to pay CGT at the end of the financial year in which you signed the contract of sale. Some people mistakenly believe they need to pay the tax immediately after settlement, but you are only obliged to pay it when you file your taxes.
Automatic Withholding of Capital Gains Tax
No, CGT is not automatically withheld. You must report it on your income tax return. Withholding or providing incorrect information to the ATO is a serious offence. However, there are legal ways to reduce CGT, including using discounts and exemptions you may be eligible for. If you’ve owned the property for over 12 months, you could get a 50% discount on your CGT.
What is the Best Time to Sell a Property for Capital Gains Tax?
The best time to sell is when your overall income is low, as CGT is taxed at your income tax rate. If you earned more in a financial year, you’ll pay a higher CGT rate. Conversely, if you have a lower taxable income, you’ll pay a lower CGT rate. Holding onto your property for at least 12 months before selling it can also reduce your CGT by 50%.
12-month Ownership Rule impacts your CGT
The 12-month ownership CGT discount means property assets held for over 12 months are eligible for a 50% CGT discount.
What should be My Main Residence while calculating Capital Gains Tax?
Your primary residence is exempt from CGT if you and your family live there, your personal belongings are there, it’s connected to utilities, and it’s the address where your mail is delivered and where you’re registered to vote. Check the ATO guidelines for more details.
Get the Expert Advice
CGT can be a complex issue, especially when you are selling a property. So it’s better to consult an expert like Nanak Accountants & Associates. We offer a gully customised accounting and taxation services to individuals and businesses alike. We can help you tackle potential issues arising from the sell of property. So don’t hesitate, reach out today.