It is important to know how it will affect you if you own or are considering buying an investment property.
What is CGT?
As the name implies, CGT is tax you pay when you make a capital gain.
When is CGT Applied?
A capital gains tax is triggered when a transaction or event results in a capital gain following the disposal of an asset. Asset can mean vacant land, shares, a business premises, holiday homes and of course a rental property. The definition of a capital gain (or loss) is the difference between the selling price and the purchase price of an asset. The charges for purchasing, such as stamp duty, and the charges for selling, such as agent’s fees, are included in the cost base. For instance, if the total purchase price for a property is $500,000 (including fees) and the selling price is $720,000 (minus $20,000 in agent’s fees), the $200,000 gain will be taxed.
CGT can also apply if the property is being gifted to another person by the seller. This means the owner is still liable for the CGT despite being not able to gain anything for the property. The tax to be paid will be computed based on the property’s market value.
What are the Exceptions?
Paying CGT has a few exceptions. The primary one is that it doesn’t apply to the sale of your main place of residence or your own home. In addition, CGT only applies to assets purchased after the CGT was implemented on 20 September 1985.
While not truly an exception, maintaining the property for over 12 months may grant the owner a 50% discount on the capital gain tax payable.
You can reduce or even get away from paying capital gains tax in two ways.
First, hold onto your property. If the only thing you do is purchase property and never sell there’d be no need for you to pay CGT.
Second, make the property you bought your main place of residence. Because your home is exempt from CGT, you can purchase and sell your home as many times as you like and not pay CGT. Moving every few years is obviously a hassle, but the benefit is that any profit you get is not taxable.
What’s written here is just general information about Capital Gains Tax. If you are thinking of purchasing property, it is wise to talk to a reliable accountant who knows property before you make a purchase.