If you buy and sell an investment property, you may be required to pay capital gains tax (CGT) on that sale. Your primary place of residence will be exempt from CGT as long as you have never rented it out.
What is Capital Gains Tax?
This is a tax that you are required to pay on any capital gain earned on the sale of an asset such as a property. CGT applies to any asset obtained after 19 August 1985.
What is a capital gain?
Very simply, a capital gain is made when a profit is made from the sale of an investment, so when the sale price exceeds the original purchase price. If you sell an investment property for less money than the purchase price, you will have made a capital loss. If you’ve made a profit from the sale, it is added to your taxable income and you will have to pay tax at the appropriate tax rate. Similarly, the loss will be applied against your taxable income.
It sounds complicated, but it’s actually pretty simple. For the sale of a single investment, take the selling price of the property then subtract the amount you originally paid for it, along with any associated costs such as stamp duty and legal fees. The amount remaining will be your capital gain.
If you make a loss rather than a gain, you will not be taxed. A capital gain is added to your income in the year you sell the investment and taxed at your marginal rate. If you held the investment for more than a year you are only taxed on half the capital gain if the property was purchased after 21 September 1999 by an individual, trust or superannuation fund.
So, if you satisfy those conditions and your marginal tax rate is 37%, your capital gains, are effectively only taxed at 18.5%.
Keep a record of any losses you make as they can be used to offset any gains. Capital losses can also be carried forward for use in later years. All you need to do is make a record of them in your tax return. When you make a capital gain in future years, you can deduct your loss from the gain.
While any investment properties sold will be subject to CGT, you do not have to pay this tax on every property you buy and sell. As we said above, your main place of residence is exempt from CGT, as long as you have never rented it out.
You also are not required to pay this tax at the highest marginal tax rate. Any capital gain obtained will be added to your taxable income and then taxed at the relative margin.
Capital Gains Tax is an important consideration in your investment strategy long-term and can not be ignored. It could be the difference between having a successful, profitable portfolio, or one that costs you.
Give one of our investment loan specialists a call if you’re thinking about buying your first investment property or adding to your portfolio. We’ll find the right solution for you.