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What is capital gains tax?

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When you decide to sell your property, depending on the market, it can be an exciting and financially beneficial experience. Along with other fees that may apply to your sale, it's important to consider your tax obligations prior to selling. Here we explain what capital gains tax is, how it's calculated and if you can avoid paying it.

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What is capital gains tax on a property?

When you sell an asset such as a property you own, you’ll either make a capital gain or a capital loss. This is essentially the profit or loss you make from the sale, which is the difference between the amount you paid for the property and the amount you receive when you sell it.

Your capital gain or loss will then need to be reported in your income tax return as part of your assessable income, not as a separate tax. This happens when you first enter the contract to sell, and not when you settle. So even when you enter the contract to sell in June 2019 and settle in July 2019, your capital gain or loss should be reported in your 2018-2019 tax return.

What is the capital gains tax rate?

Capital gains tax rates vary, depending on whether the payee is a company or an individual. Companies do not get discounts on capital gains tax and must pay 30% tax on net capital gains. For individuals, the capital gains tax you pay is generally the same as your income tax rate for that year.

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Can I avoid paying capital gains tax, are there exemptions?

Depending on your circumstances you can be exempt from paying any capital gains tax.

  • If the property you are selling is your main place of residence, you can avoid paying capital gains tax.
  • If your property was purchased before 20th September 1985, you are exempt from paying capital gains tax.
  • If the property that was previously your primary place of residence is sold within six years of first being rented out, or first produces income.
  • If you’re aged 55 or older, are retired or incapacitated, and have owned a small business for 15 years, you don’t need to pay capital gains tax.
  • An individual or small business who has made a capital gain and held the asset for longer than a year may apply a 50% discount to work out the net capital gain.

If you’ve made a capital gain on a property, you will need to pay capital gains tax. However, if you make a capital loss, you do not need to pay capital gains tax. This loss can be used to offset any capital gains in the future, but not any other type of tax.

How do I work out my capital gain or loss?

In general, capital gain is calculated from the difference between your capital proceeds, which is the amount you receive from the sale, and the cost base of your property. Cost base is mostly made up of what you paid for the property originally and other costs related to owning the property. For a capital loss, you would need to calculate it with your property’s reduced cost base to work out whether you have a capital loss.

There are also different methods to calculate a capital gain. In general, you’d want to pick the method that can get you the lowest capital gain so you pay the least amount of tax. You may also want to get advice from a tax accountant or financial manager as these calculations could get a little complicated.

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Extensions and rollovers

Before you lodge your tax returns, you may be able to request for an extension or rollover of your payable capital gains tax. This allows you to roll over the capital gain or loss from a capital gains tax until the next time you sell an asset and capital gains tax applies to you again. This way you may be able to use a previous capital loss to reduce a capital gain, so you can pay less tax.

What happens if I make a capital gain on my property?

If you make a capital gain from selling your property, you will have to report this on your tax return. As tax is not withheld from your capital gain, you’ll be the one to pay capital gains tax if it does apply to you. Be prepared to find out what you may owe when you file your tax return.

What happens if I make a capital loss on my property?

If you do make a capital loss from the sale, capital gains tax does not apply to this asset. You can use this to reduce a capital gain, but cannot claim it against the rest of your income.

How does capital gains tax impact me when I sell my home?

If the property is your main residence

Your home is usually exempt from capital gains tax if you and your family live in it. Other factors that determine this tax exemption may include: length of stay, size of the property, or if it’s not being used to produce assessable income. Whether these factors apply to you can impact your entitlement to a full or partial exemption.

Investment property / You’ve changed your home into an investment property

Even if you’ve lived in the property before, changing it into an investment property can impact your qualifications for tax exemptions, since renting out the property may produce assessable income. When you sell the property, capital gains tax may apply to you if you make a profit.

Another thing to be aware of is the six-year rule regarding capital gains tax and investment properties. Under this rule, your property can be exempt from capital gains tax if it's sold within six years of first being rented out.

Knowing your tax obligations can help you understand the process of selling property and help put you in a better position to understand your profits.

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Tags: capital gains tax, rollover, capital gain, capital loss

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