When you sell an investment property in Australia, you may be subject to capital gains tax (CGT).
However, with the right knowledge and strategic planning, you can significantly reduce or even eliminate this tax liability.
What is Capital Gains Tax?
Capital gains tax is a tax imposed on the profit realised from selling an asset, such as an investment property. To calculate the capital gain, you subtract the purchase price from the selling price.
For example, if you bought a property for $700,000 and sold it for $950,000, your capital gain would be $250,000 (minus any related expenses).
A capital loss occurs when you sell an asset for less than its purchase price. Capital Gains Tax (CGT) can be complex and it’s always a good idea to get professional help for your specific situation.
Note: CGT doesn’t apply to assets acquired before September 20, 1985.
Let’s explore how to reduce capital gains tax and potentially avoid it altogether.
Check Your Australian Tax Health
Don’t let the stress of Australian taxes from overseas overwhelm you. Start your Australian expat tax journey with a FREE ATO health check!
How to Avoid Capital Gains Tax on Your Property
We have listed nine methods to avoid paying the tax or reduce the amount of CGT payable when you profit below.
Use the Main Residence Exemption
If you’re a resident in Australia, you can be exempt from CGT for your home.
By designating your property as your main residence, you become eligible for the main residence exemption, exempting you from capital gains tax when you sell the property.
It’s worth noting, however, that if the property was previously an investment property, you may need help to claim the main residence exemption. In this case, you’ll only be eligible for a partial exemption percentage from capital gains tax.
For instance, if you rented out an investment property for three years before moving in and living there for six years before selling it, you would only pay capital gains tax on the three years the property was classified as a rental property.
So if you sold the property for $200,000, you’d only pay capital gains tax on $66,000.
According to the ATO, foreigners and non-residents aren’t eligible for the main residence exemption.
Own a Property for Over a Year
Delay selling your property until you’ve owned it for a year to reap its benefits. After one year of ownership, you may avail of a 50% reduction in the capital gains tax you owe.
Here’s an example to illustrate this:
- Suppose you’ve owned a property for one year and eight months.
- If you sell it, you’ll have a capital gain of $200,000.
- You’ll pay tax on only 50% of your capital gain.
- Your capital gains tax will be $100,000.
Use the Six-Year Rule When You Sell Property
Under this rule, if you have rented out your property as an investment or rental property for a maximum of six years and there has been a tenant occupying the property during this period, you may be able to claim exemptions on your capital gains tax.
Here’s an example to illustrate how the six-year rule works to reduce your overall CGT:
- Assume you buy a property for $300,000 and later revalue it at $400,000 as an Australian expat.
- You rent the property for two years before returning and selling it after eight years for $700,000.
- To calculate the taxable gain, you multiply the original price by 2/8 because you rented it out for two years.
- You pay capital gains tax on 50% of $75,000 because you owned the property for more than a year.
- Your capital gains tax is $37,500.
This rule is valuable for Australian expats and anyone looking to avoid capital gains tax in Australia.
Get a Reassessment of Your Property
If you’re an expat in Australia and want to avoid capital gains tax, consider getting a property reassessment. Skipping this step when selling a rental property can cost you more in capital gains tax.
By getting a revaluation, your property’s cost base will change, significantly impacting your gains when you sell the property.
Here’s an example to show how a property reassessment can help you save on capital gains tax:
- You bought a property for $250,000 and lived there for ten years.
- You had the property revalued, and it increased to $450,000.
- After being an expat, you rented it for two years and sold it for $480,000.
- Your capital gain is $30,000, and you’ll only pay tax on this amount instead of the $230,000 you would have paid before revaluation.
Getting a property reassessment is crucial if you want to avoid paying more capital gains tax in Australia as an expat.
Use a Self-Managed Super Fund or SMSF Loan
If you’re an expat looking to avoid capital gains tax when you sell property in Australia, consider using a self-managed super fund (SMSF) and SMSF loan to purchase the property. By doing so, you can take advantage of the benefits of an SMSF, which can help you avoid capital gains tax.
For instance, you can purchase the property using your SMSF upon returning to Australia after living abroad as an expat. You won’t have to pay capital gains tax when you eventually sell the property as a retiree.
However, remember that you can only live on the property once you receive your pension.
Using an SMSF and SMSF loan to purchase property can be a helpful approach to consider if you want to avoid paying more capital gains tax in Australia.
Earn a Lower Income for a Year
Lowering your income for a year can help you reap tax benefits and reduce your capital gains tax payments as an expat or investor.
Since the capital gains tax rate depends on income tax rates, the tax bracket you fall into can significantly impact how much you pay in capital gains taxes. You can reduce your capital gains tax by keeping your income low for a year.
It is an effective strategy to consider if you’re looking to avoid paying more capital gains tax on property.
Offset Your Gains in the Future
You can keep track of your property expenses. In that case, you can reduce your capital gains tax by offsetting gains with outgoings. It can solve the question of how to avoid capital gains tax.
If you experience a capital loss, you can deduct it from other capital gains you make when you sell assets in the future.
For example:
- You sell shares worth $150,000, which you purchased for $100,000, resulting in a capital gain of $50,000.
- You also sell a property you owned for eight months, which you bought for $210,000, for $200,000, resulting in a capital loss of $10,000.
- You can offset the capital gain from selling shares by deducting the capital loss from selling the property, reducing your taxable capital gain to $40,000.
You can use this approach for any capital losses you make. If you only make a capital loss, you can carry it forward to offset future capital gains.
Choose Affordable Housing Options
Investing in affordable housing can reduce the capital gains tax you have to pay. The ATO introduced a rule in 2018 that offers a 10% discount on capital gains tax for those who invest in affordable housing.
You can add this to the discount you may receive for owning the property for more than 12 months.
By combining the two discounts, you may achieve a 60% reduction in capital gains tax on property.
Apply for Home Business Assets Exemption
Are you operating a small business from your home in Australia? If so, you may be eligible for CGT concessions on your business assets.
However, to qualify for these concessions, you must meet specific criteria, including the following:
- Having an aggregated turnover of less than $2 million
- Meeting the asset test criteria for your business asset
- The maximum net asset value test
When Do You Pay Capital Gains Tax on Investment Property?
You typically pay Capital Gains Tax (CGT) when you sell a property, not while you own it. CGT is levied on any profit made from the sale of an asset, including property.
However, assets acquired before 20 September 1985 are exempt from CGT.
How Are Capital Gains Calculated on Property?
To calculate capital gains tax on property, subtract the purchase price (including costs like legal fees and stamp duty) from the sale price to determine the gross capital gain.
If you’ve owned the property for over 12 months, a 50% discount may be applied.
However, companies, foreign residents (for properties bought after 8 May 2012), and self-managed super funds have different discount rules.
- Companies and foreign residents who purchased property after 8 May 2012 are not eligible for the 50% CGT discount.
- Self-managed super funds receive a reduced discount of one-third.
What Is CGT Rate in Australia?
Capital Gains Tax (CGT) isn’t a separate tax; it’s included in your overall income tax. It typically applies to valuable assets such as property, shares, and licenses. Due to their significant value, these assets often attract more scrutiny from tax authorities.
Does CGT Apply if You Transfer or Gift a Property?
If you gift a property, you might have to pay Capital Gains Tax (CGT). This is generally the case unless the property was your main residence. The tax is calculated based on the property’s market value at the time of the gift, not the amount you actually gifted.
However, there are some exceptions. For instance, if you’re transferring property as part of a partnership dissolution, such as a divorce, you might be exempt from capital gains tax on property in Australia.
Minimise Your CGT With Australian Expat Tax Experts
Avoiding unnecessary capital gains tax doesn’t have to be complicated. With expert help, you can get more useful advice on property taxes anywhere from the world.
Whether you’re an Aussie expat or a foreign investor, our expert team specialises in tax strategies tailored to your unique circumstances. We provide personalised advice to create an action plan to reduce or avoid capital gains tax.
Start with our free Australian tax health check today. Stay on top of your Australian property taxes from anywhere!
FAQs about Minimising Capital Gains Tax in Australia
What is the 6-year rule for capital gains tax in Australia?
The ‘6-year rule’ allows you to treat your former home as your main residence for up to 6 years after you stop living in it, even if you use it to produce income (such as renting it out).
How much capital gains tax do you pay on $100,000?
Capital gains are taxed at your income tax rate. For instance, if your annual taxable income is $40,000 (in the 32.5% tax bracket) and you make a $60,000 capital gain, your total taxable income becomes $100,000. This would push you into the 37% tax bracket, and the capital gains would be taxed at this rate, 37%.
Who is exempt from capital gains tax in Australia?
To qualify for the exemption, your property must be considered your main residence, meaning it must have a dwelling on it where you have lived. A vacant block does not qualify for the exemption.
Additionally, if you subdivide and sell land that was once part of your home, you’ll need to determine whether the profit is treated as a capital gain or income.
How do I avoid capital gains tax on inherited property?
A capital gains tax exemption may apply to inherited property if it retains its main residence status. Whether you qualify for a full or partial exemption depends on the residential status of the deceased and how the beneficiary uses the property. Contact a tax professional for more specific advice.
What is a Principal Place of Residence (PPOR)?
A PPOR is the property where you primarily live, which includes regular occupancy, keeping personal belongings, and using the address for correspondence.
Only one property can be designated as your PPOR at a time for CGT purposes.
Are capital gains tax and income tax different for Australian expats and investors?
Capital gains tax is not distinct from income tax. Instead, it is an integral component of the income tax system, subject to the same rate as your income tax.
If you realise any capital gains, your tax obligation for the year may rise accordingly, as noted by the Australian Taxation Office.
What is the 12-month ownership main residence exemption?
To qualify for the CGT main residence exemption, the property must generally have been your main residence for at least 12 months before being sold.
Can I get a capital gains tax exemption when I sell my property?
According to the Australian Taxation Office, there are circumstances in which you can be exempt from paying capital gains tax when selling your property, which includes the following:
- The property is your principal residence.
- The property has been your home since the purchase.
- You have yet to use it to produce assessable income.
- The property must be on at least two hectares of land.
Furthermore, suppose you purchased the property before September 20th, 1985. In that case, you won’t have to pay capital gains tax on any profits you make upon selling it.
However, you won’t have to pay capital gains tax if you inherited the property. Still, you might have to pay the tax if you sell it and it’s not your principal residence.
How to avoid capital gains tax when selling a house?
To avoid capital gains tax when selling a house, you can use the Home Sale Exclusion. If you lived in the house for at least 2 of the past 5 years, you may exclude up to $250,000 of the profit (or $500,000 for married couples).
Another option is a 1031 Exchange. This allows you to defer taxes by reinvesting the proceeds into a new property of equal or greater value. However, it’s important to consult a tax professional to ensure you meet all the requirements.
If I reinvest capital gains, can I avoid capital gains tax?
It is improbable to get a capital gains tax exemption if by reinvesting in your capital gains as an Australian expat.
Even if you promptly reinvest in another property after selling your current one, this strategy can only offer partial relief from capital gains tax.
Can I live in my investment property and avoid capital gains in Australia?
The six-year rule for capital gains tax allows you to treat your investment property as your main residence for tax purposes for up to six years while renting it out. This means you can rent it out during this period and still qualify for the main residence exemption from capital gains tax when you sell the property.
Does CGT apply on inherited properties?
Generally, you don’t have to pay Capital Gains Tax (CGT) on inherited property. However, if you later sell the property and it’s not your main residence, you might have to pay CGT on any profit made.
How to reduce capital gains tax on investment property in Australia?
There are several strategies to potentially reduce Capital Gains Tax (CGT) on investment property in Australia:
- Utilise the Main Residence Exemption: If the property you’re selling was your main residence, you may be exempt from CGT. However, this exemption can be complex, especially if you’ve rented out the property or lived elsewhere for extended periods.
- Consider the 50% CGT Discount: If you’ve owned the property for over 12 months, you may be eligible for a 50% discount on the capital gain.
- Timing Your Sale: Strategic timing of the sale can impact your tax liability. Consult with a tax advisor to determine the optimal time to sell, considering factors like market conditions and your personal financial situation.
- Offsetting Capital Losses: If you’ve incurred capital losses from other investments, you can use them to offset capital gains, reducing your overall tax liability.
- Seek Professional Advice: A tax advisor can provide personalised advice and help you explore strategies to minimise your CGT. They can help you understand the complexities of CGT rules and identify opportunities to reduce your tax burden.
Remember, tax laws can be complex and subject to change. It’s crucial to consult with a qualified tax professional to ensure know how to reduce capital gains tax on property for your situation and ensure you’re taking full advantage of available tax deductions.
