Strategies to Mitigate Capital Gains Tax When Selling Your Home
The common saying goes that the only certainties in life are death and taxes.
However, when it comes to selling your property, capital gains tax (CGT) may not be as inevitable as you think.
This tax can apply to property sales based on factors such as your residency status in the house and the duration of ownership.
Let’s explore the key points.
What is Capital Gains Tax?
When selling real estate, you typically generate a profit, known as a "capital gain." This gain is the difference between the property's acquisition (and maintenance) costs and its selling price.
Capital gains tax is the tax levied by the government on these profits, applicable not only to real estate but also to other assets like shares, cryptocurrencies, collectibles, and precious metals.
For property transactions, CGT is calculated based on the sale contract date, rather than the settlement date.
Importantly, CGT applies only to assets purchased after 20 September 1985.
If your property predates this date, you likely won't face this tax.
Do You Owe Capital Gains Tax on Your Home?
Generally, if you have lived in your home for the entire period of ownership and haven't used it for profit, you won’t owe CGT upon selling.
However, if you’ve operated a business from your home or rented it out, you may be liable for CGT.
It's advisable to consult an accountant or the Australian Taxation Office (ATO) to understand your specific situation.
The ATO specifies that the exemption applies only to properties that are 2 hectares or less and serve as your primary residence.
Calculating Capital Gains Tax
CGT is integrated into your income tax, meaning it isn’t a separate figure but rather part of your taxable income.
To estimate your CGT, subtract your property's original cost from the sale price, and factor in expenses like stamp duty and conveyancing fees.
Primary Residence
If you want to avoid CGT on your main residence, the process is relatively straightforward. Your primary home is typically exempt from CGT if:
- You and your immediate family have lived there for the entire ownership period.
- It has not generated income.
- It occupies no more than 2 hectares.
Investment Property
If you purchase a property solely for rental purposes, CGT will apply upon sale. However, there are strategies to reduce your CGT liability:
- After owning a property for 12 months, you can access the 50% discount on any capital gains.
- Retain receipts for all related expenses (like stamp duty, renovations) since these can be added to your cost base, reducing your capital gain.
If you've claimed deductions on your tax return, such as for depreciation, these will need to be factored into your CGT calculations.
Former Primary Residence Now Rented Out
If you initially lived in a home and then rented it out, you can still consider it your primary residence for up to six years after moving out, provided you haven't used it to generate income.
If you move back in at any time during this six-year window, the clock resets.
Flipping Houses
If you buy, renovate, and sell properties for profit, the 12-month rule still applies for a potential 50% reduction on CGT.
Subdivided Properties
When selling subdivided land, each title is subject to CGT. If you lived on one of the subdivided blocks and it was your main residence, you could still qualify for the 50% discount or potentially avoid CGT altogether upon sale.
This information serves as a general guideline. For tailored advice regarding your situation and effective strategies for minimising capital gains tax, consulting with an accountant or legal professional is recommended.