Hi Nicole, I was lucky enough to sell an investment property in July of last year. We had purchased it in 2006 and tripled our money. That’s great, but we have unfortunately had to use the proceeds to buy a second home for our family, on our separation. I am worried now about the $150,000 capital gains tax bill and, given the end of the financial year is fast approaching, wonder if there is anything we can do to minimise it. I am happy to pay for a big profit, but there is not a lot of spare cash in the circumstances. I would be grateful for any ideas you may have. Holly
I am both happy and sad for you Holly.
Talking tax, I take it you have never lived in the property?
For next time – and for other readers – if you have lived in a now-investment property first, you can nominate it as your principal place of residence for the next six years.
If you then move back in for a period, say a year, you could trigger another six years. However, anyone thinking of doing this should talk to their accountant first: you cannot treat another property as your main residence during this time.
Capital gains tax is only payable on assets – whether real estate, shares or other investments – bought after September 20, 1985.
Now the good news is that, having owned the property for more than a year, you qualify for a 50 per cent tax discount.
The profit will be divided between the two of you (in ownership proportions), and then half of it knocked off.
How do you assess said profit? It’s the price you fetched versus the price you paid, less other items that can be added to the cost base.
So, the first step in trying to contain the capital gain, is making sure you have included in the cost base your eligible spend on such things as a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal or tax adviser expenses and transfer, advertising/marketing and the cost of transfer.
There are .
Generally, over the life of holding the asset, you do not include any costs for which you can claim a tax deduction, such as capital works.
Your capital gain is added to your annual salary and tax levied on it at the applicable tax bracket. So, if you earn $60,000 a year and add a $60,000 capital gain, your total assessable income for that year will be $120,000.
The tax rate hits 45 cents in the dollar once income reaches $180,000, so also try to lower your employment earnings. You can implement standard tax-time strategies to achieve this, such as bring forward deductible expenses for next tax year to before July 1.
Essentially, anything you have bought as a requirement for your job, provided you have the paperwork to prove it, could be deductible.
Examples include the cost of tools and equipment, the cost of using your car for work (but not for driving to and from work) and the cost of travelling for work (if you’ve managed that! ). Working-from-home expenses (phone and internet expenses) may be more relevant this year.
In , there may be some weird and wonderful ones, too.
The golden rule is to not claim anything for which you have not paid for, or which you have been reimbursed. Additionally, you might delay any income that you can until the 2022-23 tax year.
There is another opportunity before July 1, too.
If you can spare the cash, make a personal contribution to your superannuation.
You might be able to as a tax deduction to offset some – or all – of the taxable gain.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
Nicole Pedersen-McKinnon is the author of . Follow Nicole on , or .