March 04, 2013
Don’t forget capital gains tax!
There are a number of different situations that trigger capital gains tax, but one of the most common is selling an investment property. For capital gains tax to apply to a property sale in Australia, the seller must receive a financial gain from selling it, in that they derive a profit on the original purchase price. If you wish to throw some figures around give me a call on 0413 245 556 or complete our online form to discuss.
This may be a result of the property simply increasing in value since the purchase and that built-up equity hasn’t been utilised, and/or through paying down some of the ‘principal’ (purchase price) while the property value has remained stable or increased.
Good news for homeowners is that owner occupiers are not liable to pay capital gains tax. Any capital gain or loss made on the disposal of a taxpayer's main residence is exempt. Once the Australian Tax Office deems it your main residence (proven that you have lived there since you acquired it and it was for the purpose of owner-occupying), you may also be able to rent it out for up to six years without losing your main residence exemption. Situations where this could occur include accepting a job offer interstate or overseas, travelling for an extended period of time or moving to care for a sick relative.
Unless there is a capital gains tax exemption, you will be up for paying tax on your capital gain. This is usually the case when selling an investment property. The total capital gain of a taxpayer is calculated by subtracting the cost base from the money you received from the investment property sale.
Keep in mind capital losses on investments (ie. you received no profit from selling your property) are not deductible against your ordinary taxable income but they are used to reduce any other capital gains you make from assets during the financial year or any gains in subsequent years. You can carry forward capital losses indefinitely, but you must apply them in the order you acquired them to gains when they arise (ie. you cannot decide which year you want to use them).
Apart from capital gains tax, there are also a number of other costs involved with selling an investment property.
A good idea is to budget for loss of rental income and loan interest repayments if the property is vacant during the sale period and/or takes a while to sell. Take into consideration fees that may be incurred when marketing a property for sale, including cleaning and/or hiring display furniture. If using a real estate agent, remember to factor in agent commissions. Keep in mind the benefits of a good agent and that gaining a higher price for the sale may outweigh their higher commission fee.
Keep in mind the importance of time - the longer it takes to sell your property the more out of pocket you’re likely to be.
If factoring in capital gains tax and all the associated costs of selling your investment property is enough to make you reassess your decision, then also take into consideration that you may miss out on the income stream, tax breaks, future capital gain to be made and the potential to leverage a second (or more) property.
Most importantly, remember that property investment is a long-term strategy.
For more information contact Richard Windeyer on 1800 01 LOAN or click here to "Book a Meeting"