When selling a house how can capital gains tax CGT be avoided

15 Jan 2021
Jon Byrne

While at first thought, capital gains tax can sound daunting, with a bit of knowledge and planning, it is possible to greatly minimise or even fully eliminate how much of it you pay.

For those who are new to this, capital gains tax (CGT) is the levy you pay on the capital gain generated from the selling of that asset.

The difference between what you paid for an asset and what you sold it for is a capital gain (or loss)- less any fees incurred during the purchase. So, if you're selling a house for more than you've paid for it, it's a capital gain. And that's called a capital loss if you sell it for less.

While it is often best to seek legal guidance about how your particular case is related to the law, this guide offers some valuable tips to set you on your way.

When do you have to pay tax on a property on capital gains?

Generally, capital gains tax (CGT) would apply if a property is sold for a benefit. Yet exceptions still remain. No CGT, for instance, applies if the property is the principal residence of an individual, i.e. their home.

If the property was bought before September 20, 1985, is another common exception . Bear in mind, however, that any major changes or renovations that have been made since that date will be considered as a separate asset under the law and thus subject to CGT.

Meanwhile, if the property is used in conjunction with a company and the taxpayer passes a number of checks, small business concessions on CGT may also apply.

How is the capital gains tax on real estate calculated?

CGT is measured on the basis of the amount of profit you gain from the selling of a house, the marginal tax rate and the tax deductions you apply for.

Gross capital gain, minus the purchase price and related costs, can be described as the selling price.

A 50 per cent discount is usually applied to the benefit when a property has been owned for more than 12 months. Companies, however, are not entitled to this discount, nor are international citizens who have acquired their property after 8 May 2012, and the self-managed super funds only enjoy a one-third discount.

Any other money you receive during the year in which you sell your property must be factored into your CGT calculations, as your marginal tax rate will influence how much CGT you actually pay. This is because CGT is not really an independent tax, but rather an aspect of your income tax considerations.

How to stop tax on your land on capital gains

When it comes to paying capital gains tax, there are a range of concessions and exemptions, and various methods designed to lower the total tax bill, too.

Here are some of the main tactics used to keep CGT from paying:

Key Exemption from Residence

Temporary guideline for absence.

Superannuation Investing.

Timing the gain or loss of money.

And partial exemptions.

1. Using the Primary Exemption from Residence

If your primary residence is the property you are selling, the income is not subject to CGT. However, if the residence has been used for generating revenue, the exemption may not be entirely available. A part of the capital gain would be taxable in this situation.

2. Using the temporary law of absence

The temporary absence law, an extension of the main residence exception, refers to a case in which you travel out of your main residence.

If you initially purchase a property as your principal residence and then rent it out, you will continue to treat the property as your main residence permanently, or for up to six years. And if you move back to the leased property within six years, the term is reset and another six years will be considered as your primary residence.

3. Superannuation investing

Although CGT only earns a one-third discount from self-managed super funds, the regular tax rate for funds is only 15 percent, which ensures that the maximum CGT rate is 10 percent. This is lower than the marginal tax rate of most citizens.

If a member of the self-managed super fund initiates a complete retirement pension from the fund's assets, the applicable rate drops to zero.

4. Get your capital gain or loss timing right

Taking into account the timing of when you make a capital gain or loss is an easy tactic to minimise CGT. If you know your income will be lower in the next financial year, you can opt to delay selling until then, so that your lower marginal tax rate results in you paying less CGT.

Timing loss may also be beneficial. An example of an investor planning to make a capital gain from a sale, but also owns securities that are trading lower than the capital gain at an unrealised loss. The individual can consider selling the shares before the sale, so they can subtract the loss from their capital gain.

5. Dream of partial exemptions

Holding a property for more than 12 months will give CGT a 50 percent discount, and if you move into a rental property, you will also obtain a partial exemption.

If you still use your primary residence as a place of business, you are also entitled to a reduction in CGT.

Investing in affordable housing, meanwhile, will attract a 60% decrease in CGT as long as the housing meets certain conditions and the rent is paid at a reduced rate.

It is possible to apply capital losses against your capital gains as well, but not against your ordinary income.

However, as ever, insure that you seek expert advice to get the best result for your particular case.

Note this article is not financial or legal advise. Please check with your financial and legal specialist counsel before making any decisions of your own.

For further information about real estate in this area, contact No Bull Real Estate, your most reliable and friendly real estate agents in Newcastle and Lake Macquarie. Buying, selling, leasing for residential, commercial, industrial property, contact your local expert to buy, sell or lease today on 49552624 or https://www.nobullrealestate.com.au

When selling a house how can capital gains tax CGT be avoided

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