Selling Your Investment Property?

Selling your investment property?

Thinking of selling your investment property in this hot Covid market but worried how capital gains tax will smack you down? This may be a non-issue! There are some loop holes (exemptions) that may fit you. Read on!

The rule of thumb is if you have an investment property (or other investment vessels, such as shares), it will attract CGT upon sale but it’s not always that clear cut.

WAYS CAPITAL GAINS TAX MAY NOT APPLY TO THE SALE OF YOUR INVESTMENT PROPERTY

1. The 6-Year Rule
   Did you live in your house then rent it out? If so, you can continue to treat it as your main residence even if you’ve turned it into an investment property.
   Catch: if you purchase another home to live in, you cannot protect it from capital gains tax too. You will be allowed to choose which property is CGT exempted and which will be exposed to capital gains. This can be a calculated decision based upon property values to reap the rewards of this 6-year rule. We love this!

   • If you move in and out of the investment and don’t own another main residence at the same time then the 6-year rule may apply. If owned over 6-years then only the applicable periods in which you lived in the property will be CGT exempt.

2. Main Residence
   You can only have one “main residence” at a time. Cases when this may apply:

   • If you own two properties, live in one and have family in the other, only one property is CGT exempt. Choose wisely as to which one that will be.

   • On the other hand, if you’re renting where you live and own two investment properties that you never lived in, CGT will apply to both these properties. If you did live in one of them before it was rented out then the 6-year rule could apply.

3. The 6-month Overlap
   If you are changing homes, you can own two main residences at the same time for up to six months, even if the new home you’ve purchased is currently being rented out.

4. House-Flipping
   If you occupy a property while you’re renovating and sell it, it can still be considered your main residence and CGT free, even if you sell it within 12mths for a gain.

   • Caution: if you do this regularly and especially if you don’t earn any other income, the ATO may deem this to be business activity and tax you on the profits as income which it probably is if you’re successfully supporting yourself doing this.

WHEN WILL CGT POP UP WHEN I DON’T EXPECT IT TO?

1. Running your business out of your home
   A portion of your home may attract capital gains if you run your business from your home but only if that same portion is claimed as a deduction against your relevant income. Will the tax saving year to year be worth the CGT worry come time to sell? If you don’t see yourself selling in the foreseeable future then usually we’d say go for it otherwise you may choose not to claim a portion of your home expenses (rates, mortgage interest, etc) and avoid CGT burden.

   • Benefit to this catch out is that CGT is only applicable to the same percentage claim for your business use and also only for the period that you were doing so. A few percentage cuts so you’ll need your accountant’s help to get it right!

2. Air BnB or Board
   If you rent out your home from time to time as an “Air BnB” or rent out a room or two, the relevant percentage of such will attract CGT upon sale, similar to if you operate a business out of your home and claim the expenses. The 6-year rule unfortunately doesn’t apply unless you completely move out. You also cannot avoid this CGT by resisting claiming the deductions against the rental income you receive.

   • That said, if you move out entirely and rent your home solely as an “AirBnB” it may qualify the 6-year rule.

   • If it wasn’t clear, any rental income you receive under these circumstances needs to be declared as assessable income on your tax return and in which case we’ll ensure you claim everything you can!

3. More than 2 Hectares
   If you’re lucky enough to be living on a pile of land, only two hectares can be treated as exempt from CGT. A rule brought in place by the ATO’s assumption that anyone with this much land would be operating a farming business of sorts.

   • Benefit to this catch is you may choose the two hectares upon valuing your property but it must include the land your home sits on.

   • If the property was an active asset to a business on a rural/commercial property, this opens access to other small business CGT concessions, such as the 50% Active Asset Discount and the Retirement Exemption just to name a few. Ask us more about this!

CGT concessions

For those properties up against CGT, none of the above takes away the 50% CGT Discount that is available to all individuals who own the property for over 12mths.

If your property is owned in a company or trust, ask us more about this as the availability to CGT concessions can change.

If the property was an active asset to a business and commercial in nature, this opens access to other small business CGT concessions, such as the 50% Active Asset Discount and the Retirement Exemption etc. Ask us more about this!

CGT EXEMPTION TOOL

So everyone wants a tool to help work this out! Other than talking to your accountant that is which you certainly should. The ATO’s interactive tool here:
Questions | Capital gains tax property exemption tool (ato.gov.au)

need help?

Reach out if you need help with any of this. Many of our clients will be affected and we’re on board to make this a smooth transition.