Capital Gains Tax – Are you exempt?
Are you thinking of selling a property? Before you do, you need to know if there are any Capital Gains Tax (or CGT) implications that may apply. Most owners are exempt from paying CGT but are not really aware of their situation, so it’s worthwhile speaking to your accountant or financial adviser before you visit the real estate agent to list your property.
Before we go any further, let me explain what CGT is exactly so we are all on the same page. CGT was introduced on 20 September 1985 and is the tax payable on the difference between what it cost you to purchase an asset and the amount you received when you sold the asset. The calculation is as follows:
Selling price – selling costs – original purchase price + associated selling costs = Capital Gain (or Loss)
When you sell an asset such as a property, a CGT event is triggered. If you’re an investor, you may not be liable for some of the costs involved in paying CGT if you fall within any of the ATO exemption rules below:
6 Month Rule
Under this rule, the ATO allows you are able to hold 2 primary places of residence. An exemption is available if you purchase a new home before you sell your old home. In this situation, both houses are considered the primary place of residence for up to 6 months, when:
- The previous property was your primary place of residence for a continuous period of at least 3 months in the 12 months prior to the sale
- You did not use the old property to provide an assessable income in any part of the 12 months when it was not the primary place of residence
- Your new property becomes your primary place of residence
If you dispose of your old home within 6 months of purchasing your new one, both the properties will be exempt for the whole period between when you acquired the new home and sold the old home.
6 Year Rule
If you choose to move out of your home and rent it out, a CGT exemption will be available to you for up to 6 years after you move from the property. There are some conditions on when this may occur such as, if you accept a job interstate or overseas, are staying with a sick relative long term or go on an extended holiday (wouldn’t that be nice). There is currently no limit to the number of times you can reset this rule, as long as the absences are less than 6 years. However, if you choose this exemption rule, you cannot treat any additional dwelling you own as your main residence for that period.
Principal place of residence
If the property is your principal place of residence, that is you, reside, occupy or live in the property a CGT exemption is available. However, the property must have a main use of residential accommodation and be located on land under 2 hectares in size.
You are only able to own one property as a principal place of residence at a time and therefore, can only claim one GCT exemption at a time. However, exemptions such as the 6 month rule above do apply.
Fifty percent discount for property investors
If you are an Individual or small business owner who holds income producing investment properties for more than 12 months from the date of the purchase contact before selling the property, you will receive a 50% exemption from CGT.
We also recommend that you speak to your accountant to find out how claiming depreciation deductions can impact on CGT.
If you are considering selling an investment property, we strongly recommend that you contact your accountant to get personalised advice for your situation.