Tax implications of selling property

The saying that ‘nothing in this world is certain, except death and taxes’, has more than a grain of truth when it comes to selling property in Australia. As a vendor taxes are one of many costs you need to budget for when you sell a property.

Some of these include your real estate agent’s commission, advertising and auction fees as well as other ‘voluntary’ costs such as renovation and house cleaning.

The most obvious tax you're likely to incur when selling is Capital Gains Tax (CGT), though in some cases you could actually be exempt. This will depend on your individual circumstances.

Read on to find out what taxes you may be liable for and what exactly applies to your situation.

Understanding Capital gains tax

You're liable to pay Capital Gains Tax (CGT) on any profit (gain), you make on an investment. This includes the sale of an investment property and if you decide to gift a property to someone. CGT also applies to other investments such as shares. Because of the term many people think that CGT is a separate tax - this is not the case. It's simply part of your annual income tax assessment and submission for the tax year.

You are liable to pay Capital Gains Tax (CGT) on any profit (gain), you make on an investment

Working out your capital gain

Working out your capital gain (or loss) is as easy as taking the selling price and subtracting what you paid for the property plus any expenses you have incurred doing renovation works or maintenance. The balance is your capital gain/loss and is the amount which the ATO will assess. If you a co-own a property, your capital gain or loss will be proportional to the holding you have in the property.

If you a co-own a property, your capital gain or loss will be proportional to the holding you have in the property 

In what situations will you pay CGT?

You will generally only pay CGT when you sell any property that you don't live in. Examples of this include a rental or investment property as well as industrial and commercial premises.

Working out what you're liable for in an income year is easier if you keep detailed records. This includes receipts of all expenses related to your investment, valuations of the property and all sale documents.

Who is exempt from Capital Gains Tax?

If you have sold a property that you have lived in, ‘the main residence’ exemption applies. If you bought a property before 20 September 1985 you're also exempt from paying CGT if you decide to sell it. 

This is the date CGT was introduced and any assets purchased prior to this are referred to as ‘pre-CGT assets’.

What is ‘the main residence’ exemption?

According to the ATO, 'in general, your main residence (your home) is exempt from capital gains tax (CGT)'. You do need to meet certain criteria for a dwelling/property to be classed as your main residence or home. These include:

• Living there (the longer you live there the better)
• Having all your possessions there
• Getting your mail delivered there
• Having the address on the electoral roll

That means if you sell the property where you live, you don't have to pay CGT. You're only liable to pay CGT on a property that is not your primary residence.

You are only liable to pay CGT on a property that is not your primary residence

Are there other ways to avoid CGT?

While you cannot avoid CGT entirely on an investment property, there are ways to minimise the obligation. Not selling your investment property is an obvious strategy. 

However, keeping the property for longer than a year also helps to reduce your payable tax by 50 per cent, as does holding it in in a SMSF.

Consider a $1 million property that's appreciated by $100,000. If an investor sells the property within a year, their entire $100,000 capital gain is subject to tax. Assuming a 30% tax rate, this would be $30,000 in CGT.

On the other hand, had they held the property for over a year, only half of the capital gain ($50,000) is subject to tax. In this case they would only pay $15,000 in CGT. 

What if you make a loss on your investment property?

As we have seen a gain is when you make a profit on your investment property. You can also just as easily make a capital loss. If you sell a property for less than what you paid for it, it's classed as a capital loss. This may sound far fetched in the current market, but it's a reality that many investors are finding in post-boom mining towns across WA.

In the event of selling your investment property at a loss, you may be able to use that loss to offset other taxable income, which can lower your overall payable tax.

Additionally, if your total losses exceed your income, you may carry those losses forward to future tax years to offset gains.

What about stamp duty?

Stamp duty is a tax that all states and territories levy on property purchases. It only applies if you buy a property.

Get advice on your CGT status

Taxation can be a complex area to navigate, and everyone’s circumstances are different. Make sure you get the appropriate advice around your CGT obligations. The ATO has resources to help you understand and work out your CGT.

Download our Smart Sellers Guide below to make sure you have all your bases covered when you sell.