When you sell an investment property, capital gains tax will normally be payable on the sale.
The capital gains tax that you pay is the difference between what you pay for the house and land, and what you receive when you sell it.
However, there are ways to avoid paying capital gains tax on selling an investment property. The Australian Taxation Office (ATO) has allowed certain exemptions on capital gains tax for investment properties. The following is a summary of those exemptions.
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Your principal place of residence is exempt from capital gains tax. However, you can not claim more than one property as your principal place of residence.
If you sell your principal place of residence and have lived in it when it was fist bought, the property is exempt from any capital gains tax.
Even if you rent out your house after you have lived in it, you are exempt from capital gains tax when you sell it, provided that the house has been rented out for less than 6 years.
However, if you rent the property out when you first buy it, you are not entitled to a capital gains tax exemptions. The reason is that the Australian Taxation Office deems that you purchased the property with the purpose of having an investment and making an income from the property.
If you own an investment property for more than 12 months, the capital gains tax is discounted by 50%, which means that you only pay tax on half of the gain that you make in it’s sale.
If the property that you initially lived in is rented out for more than 6 years, you are still entitled to an exemption for the first 6 years when it is rented out.
The gain is apportioned equally over the period it is rented for. For example if the property is rented out for 10 years, you will only pay tax on 4/10ths of the capital gain which is made on the sale.
You can change the status of an income producing property to your principal place of residence or vice-versa, is it important when doing this to obtain a valuation at the time the change is made.
A real estate agent’s valuation is normally sufficient, however we recommend that you obtain a valuation from a licensed valuer.
Understand How Capital Gains Tax On Profits Can Be Avoided With A Full Or Partial Exemption
Watch this video for an explanation on how the ATO treat capital gains on the sale of a property share or other asset.
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As you can see from the above, capital gains tax can become and very complex area, and dependent on the individual circumstances of the tax payer.
If you are thinking of selling your house or investment property, or changing the status of an investment property from principal place of residence to an income producing property or vice-versa, we strongly suggest you talk to us first so that we can discuss ways of minimising your capital gains tax.