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Four Ways to Minimize or Avoid Property Capital Gains Tax in Australia

Aussie house

Whether you are buying it as a home or as an investment, property is an asset. If you ever want to or have to sell it, you’d likely be looking forward to making a nice profit. Yet, the joy of selling the property can be quickly dampened when the capital gains tax (CGT) rears its head. Fortunately, you do not have to endure the anguish of CGT. It is possible to make a healthy return from a real estate transaction while paying little to no CGT. The following is a look at some of the ways how.

Hold for At Least 12 Months

When you own property for at least 12 months, you qualify for a 50 percent tax discount on the capital gain when you sell it. For example, let’s say you bought a property a couple of years ago and recently sold it. If you made a capital gain of $200,000, the taxable amount will be 50 percent of this i.e. $100,000.

Move In Immediately

When you move into a property as soon as you buy it, it can be designated as your Primary Place of Residence (PPOR). By law, your PPOR is exempt from CGT. Ergo, all the profit is yours when you sell it. As a bonus, if this happens to be your first home, you’ll have met the requirements for the First Home Owner Grant.

If you happened to rent out the property first before moving in later, it would still qualify as your PPOR but you’d only be entitled to a partial exemption of CGT. This partial exemption is calculated as the proportion of ‘years lived’ to ‘years of owning the property’.

Revalue Prior to Renting Out

If you rent out the property then sell it later on, the capital gain is computed as the difference between the eventual sale price and the value of the property when it was rented. However, in case the property was not revalued when you rented it out, the capital gain will be calculated based on the original purchase price.

Normally, there’ll be a smaller capital gain when the revalued price is used than when the original purchase price is applied. The result of the revaluation thus means payment of less CGT overall. Ergo, it is crucial that you get a licensed valuer to revalue the property prior to renting it out.

Make Use of the 6 Year Rule

You can rent out the property for 6 years or less and still qualify for a complete CGT exemption. The only condition is that you must not be using a separate property as your PPOR. A key advantage of this rule is that the 6 years do not even have to be continuous.

In case the house is vacant for a while before this window is breached, the vacant period will not count toward the 6 years. So, if you rented out the property for 4 years then stayed for several months without a tenant, the counter stops. In the event that you rent it out for more than 6 years, you’ll only be required to pay CGT on the months or years that the 6 years were exceeded.

An important point to note though is that this rule is cumulative. That means if you own two properties that qualify and you rent both out at the same time, the CGT will kick in after just 3 years on both properties.

Tax is a sensitive matter and you never want to find yourself falling afoul of the law. That’s why you must involve property lawyers, Sydney based, and your tax accountant in all key stages of the process. All property purchased before 20 September 1985 is exempt from CGT. Now you may find this article on CGT in New Zealand interesting.