There comes a time in our lives that we sell our properties at some point and this, of course, leads to the question – if I sell will I have to pay tax?
Under Australian Tax Law, if your property is your primary residence, that is that you live there and do not earn any income on the property (including partial renting of your premises) then your property is exempt from paying capital gains tax.
Of course, things get a little fuzzier when you look at rental properties or premises that are used to partly generate some income. Below you will find some guidelines in regards to capital gains in these circumstances.
- If you sell an investment property you generally need to pay capital gains tax on any gain you have made on the property.
- A loss on a sale of an investment property will mean no tax payable and those capital losses will carry forwarded to offset any future investment earnings (and this is not limited to property it could be for sale of shares for example)
- Have you rented your property for less than six years? Then you can treat this home as your main residence and the property will be exempt from capital gains tax. IMPORTANT! You cannot treat two homes as your main residence at the same time. So if you own your own home and sell a rental property that you have rented for less than six years you will lose your primary residence exemption on your main residence for the period you have held your rental property. You can read more about this here: https://www.ato.gov.au/General/Capital-gains-tax/Your-home-and-other-real-estate/Your-main-residence/Treating-a-dwelling-as-your-main-residence-after-you-move-out/
- Capital Gains Discounts apply if you hold your property for more than 12 months. This allows a 50% discount on the gain of your property that you pay tax on.
- Did you know that if you depreciate your rental property and its assets that this is added to your gain at the time of sale? It’s great to be able to reduce your rental property income, but many people do not realise that depreciation needs to be added to any gain at the time of sale. Depending on how high your depreciating expenses are this can increase your capital gains tax substantially or turn a capital loss into a capital gain. It’s important you know this so there are no surprises come the time of sale.
- How do you know if you have a capital gain or loss on a sale of a property? Below is a general formula to work out your gain or loss on the property is as follows:
Sale Price and Sale Costs (such as commissions and legal fees) LESS Purchase Price and Purchase Costs (such as stamp duty and conveyancing costs) PLUS any Depreciation expenses on the property (if applicable)
= CAPITAL GAIN (or Loss)
Held the property for more than 12 months?
= GAIN x 50% discount
= Taxable CAPITAL GAIN
- Your Capital gain on the sale of your property is not your taxable amount. This gain is added to your income and taxed at your marginal rate. This means you could be pushed into another tax bracket depending on your earnings and capital gain.
As usual, if you are looking to estimate capital gains from a property you have sold, or you are looking to sell a property and would like tax advice, we would always recommend making a time to have a chat as everyone’s circumstances are different.