If you own property, or are planning to, you’ve probably heard of capital gains tax, or CGT, but might not fully understand how it applies to you. Our guide to capital gains tax will help you understand the ins and outs of CGT. Most importantly, how it might affect you, if at all!
If you are planning on purchasing or selling property, however, you need to understand all the costs involved. This guide to capital gains tax will help you become fully informed before you make any important decisions when buying and selling property.
What is capital gains tax (CGT)?
Capital gains are essentially the gains (or profits) you make on an asset, or, in other words, the difference between how much you paid for the asset originally and how much you sold it for, minus any buying and selling costs. When it comes to buying or selling a home, this might include stamp duty (when buying) or advertising costs (when selling).
How does capital gains tax work?
Are you wondering how to calculate your capital gains tax? Well, if you bought a property in 2001 for $200,000 and sold it for $750,000 in 2021, your gross capital gain would be $550,000.
From this, you still need to factor in all the costs that come with buying, owning and selling your home. If your purchase costs in 2001 were $2,100, your ownership costs (paying taxes and home insurance over the years, for instance) were $152,000 and your selling costs in 2021 were $31,000, your total capital gains would be $364,900.
Thankfully, property owners who have owned a property for over a year are eligible for a 50% discount on their CGT. That means that, in this example, you would only need to pay capital gains tax on $182,450.
When does capital gains tax need to be paid?
Capital gains tax is paid in the year that you sold your property.
In our example above, the final total of $182,450 CGT would get added to your taxable income within the year that you sold your property. This effectively means that if you are in the highest tax bracket, you could be paying as much as 45% tax on the profit of your sale.
When does capital gains tax apply?
The good news is that not everyone needs to pay CGT; there are some exemptions.
You don’t need to pay CGT if:
- You’re selling your primary place of residence
- Your taxable income including the gains from selling a property is less than $18,200. This has to be in the same year that you sold your property
- You purchased the property as your primary place of residence, but had to move for other reasons like a job for a period of up to six years
- The property was purchased before September 20, 1985 and no major renovations or extensions have been made.
You can also significantly reduce your capital gains tax if you strategically time the buying and selling of your property. For instance, if you’re not working for a year, that would significantly reduce your income. This would offset the tax you would have to pay if you sold property in the same year. Or, if you have sold shares at a loss, you could offset this loss against gains you received that year.
We hope this guide to capital gains tax has helped you understand how it might apply when buying and selling your home. That said, CGT can be a complicated tax to apply. We recommend speaking to a qualified accountant before making any decisions that affect your personal finances significantly.
Property investing can be highly lucrative, but it requires time, knowledge and carefully applied strategy to guarantee good returns. To learn more about property investing, click here. Or, contact us directly to find out if now could be a good time for you to sell.