With Wagga Wagga property values rising strongly over the past year, many owners are thinking about what a sale might mean for their tax position. Capital gains tax, often shortened to CGT, is one of the most commonly misunderstood parts of selling property. This guide explains the basics. It is general information only, and your accountant should confirm how the rules apply to your situation, particularly because tax rules can change.
What Is Capital Gains Tax?
Capital gains tax is not a separate tax. It is the way a profit on selling an asset, including property, is included in your income tax return. Broadly, a capital gain is the difference between what you sold the property for and its cost base, which includes what you paid for it and certain costs of buying, holding and improving it.
Your Home and the Main Residence Exemption
Generally, the sale of your main residence is exempt from capital gains tax, provided it has been your home for the whole time you owned it and meets the relevant conditions, such as the size of the land. The exemption is one of the reasons many Australians never pay CGT on the sale of their family home. There are specific rules if you have ever rented the home out, lived elsewhere for a period, or treated more than one property as your main residence, so it is worth checking your own circumstances.
Investment Properties
Investment properties are generally subject to CGT when sold. The gain is calculated using the sale price, less the cost base. Costs that may form part of the cost base include the purchase price, stamp duty, legal fees, and the cost of capital improvements, though the detail matters. Ongoing deductions you have already claimed, such as repairs, are treated differently, and depreciation claimed on a property can affect the cost base, so records matter.
The Timing of a Sale
For CGT purposes, the date of sale is generally the date contracts are exchanged, not the settlement date. This can matter if exchange and settlement fall in different financial years. It is worth discussing timing with your accountant before you sign a contract, particularly if your income varies from year to year.
Holding Period and Discounts
Under the rules at the time of writing, individuals who have held an asset for more than twelve months may be entitled to a discount on the capital gain. Because tax settings can be adjusted, including through federal budget measures, you should confirm the current rules with the Australian Taxation Office or your accountant rather than relying on a general guide.
Keeping the Right Records
Good records make CGT much easier to calculate. Useful records include the original contract of sale, settlement statement, records of stamp duty and legal costs, invoices for significant improvements, and any depreciation schedule. If you can’t find older documents, your solicitor, conveyancer or accountant may be able to help recreate them.
Selling Inherited Property
Inherited property has its own CGT rules, which depend on when the owner acquired the property, whether it was their main residence, and how long the estate takes to sell. If you are dealing with a deceased estate, it is worth speaking with the estate’s solicitor and an accountant early.
Planning Ahead
If you are thinking of selling an investment property in the next year or two, speaking with an accountant before you list can help you understand your likely position and plan the timing. It is also worth thinking about what you will do with the proceeds, whether that is paying down debt, buying another property or investing elsewhere.
Frequently Asked Questions
Do I pay capital gains tax when I sell my home? Generally not, if the property has been your main residence for the entire time you owned it. If you have rented it out or lived elsewhere for part of the time, partial CGT may apply.
When is the sale date for CGT purposes? Generally the date contracts are exchanged, not the settlement date. This can affect which financial year the gain falls into.
Can I reduce my capital gain? Costs that form part of the cost base, and any available discounts, may reduce the taxable amount. An accountant can explain what applies to your situation.
Do I need an accountant to calculate CGT? You are not required to use one, but given the detail involved in cost base, exemptions and timing, many sellers find professional advice well worth the cost.
Does CGT apply to vacant land? Generally yes, vacant land is a CGT asset, and the same principles apply, although the main residence exemption has specific conditions for land.
Thinking About Selling?
Whether you are selling a home or an investment property, our team can give you a clear picture of your property’s current market position so you can plan with your accountant.
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