As a property investor, at some point it’s likely either you or your beneficiaries will be required to pay Capital Gains Tax. Capital Gains Tax (CGT) is the tax you pay on any profits you make between the time you buy and sell an investment property. Take a look at what CGT is and how to calculate it.
What is Capital Gains Tax?
Capital Gains is the difference between what it cost you to buy an asset – in this case an investment property – and what you receive when you dispose of it, according to the ATO (Australian Tax Office).
Capital Gains Tax (CGT) is applied to any asset you’ve acquired since 1985 when Capital Gains Tax was first introduced in Australia. It’s not a separate tax though; instead CGT is paid as part of your income tax.
Assets like your home, car and personal use assets like furniture are exempt from CGT, and CGT does not apply to depreciating assets used solely for taxable purposes, like business equipment.
How much CGT will I need to pay?
There are three ways CGT can be calculated, and you can choose the method that gives you the best result – the smallest capital gain – provided you meet certain conditions.
• Discount Method – For assets held for 12 months or more, you are eligible for a 50 per cent discount in the rate of tax you are required to pay.
• Indexation method - For assets acquired before 11.45am (by legal time in the ACT) on 21 September 1999 (and held for 12 months or more before the relevant CGT event), CGT is calculated by increasing the cost base for your property applying indexation, effectively reducing your capital gain for tax purposes.
• Other method - For assets held for less than 12 months, you are required to pay the full rate of CGT on any capital gain you make.
Because CGT can be tricky to calculate, it’s a good idea to have a tax accountant go over the figures with you.
There are also a number of Capital Gains Tax calculators available online – an example right here.
Remember, CGT is only payable in the financial year in which you sell your investment property, and if your rental property was acquired before 1985 then no CGT is payable unless any major improvements were made to the property since 1985.
It pays to partner with a professional
If you are in the market to buy an investment property, get in touch with a Mortgage Express broker first, to ensure you’re in the best position financially when it comes to a mortgage.
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