Tax on selling an investment property

Selling an investment property can be a financially rewarding move, but it's important to understand the tax implications that accompany such transactions.

In this article, we'll explore various tax considerations and strategies that come into play when selling an investment property. From deciphering depreciation benefits to understanding property-related deductions and other tax factors, we aim to provide you with  insights and  guidance to help you navigate the tax landscape effectively.

Whether you're a seasoned real estate investor or a first-time seller, grasping these essential aspects is essential in ensuring you make the most of your investment property sale.

Capital gains tax on investment properties 

If you’re selling an investment property, chances are you’ll be paying capital gains tax (CGT). However, how much you pay primarily depends on when you sell the house in relation to when you first bought it.

Selling within 1 year

If you sell your investment property within 1 year after buying it, 100% of your capital gain will be subject to capital gains tax.

You might see this situation play out when people simply want to make quick gains or are no longer being able to afford to hold the property. 

Suppose you’ve just sold your property after 2 months of holding it and made a capital gain of $10,000. Assuming a tax rate of 20%, the entire $10,000 is subject to a capital gains tax of $2000. 

Selling after 1 year

If you're selling after 1 year of holding your property, only 50% of your capital gain is subject to capital gains tax.

By using the same 20% tax rate and $10,000 capital gain from the example above, this would mean that you would only have to pay $1000 in taxes since only $5000 is subject to capital gains tax. 

It’s always best to consult a good agent to find what the best course of action is for you. 

How much is capital gains tax?

Capital gains are taxed at the same rate as your taxable income. This means if you made a capital gain of $100,000 with an income tax rate of 20%, you’d pay $20,000 in capital gains tax (assuming you sold it in under a year). 

This means higher earners will typically pay a higher percentage of capital gains they make and vice versa. 

On average, this tax rate works out to be a bit less than 30% in Australia. 

Land tax on investment properties 

Another tax to consider before selling your investment property is land tax. This is a tax that is typically paid annually in Australia which generally applies to all investment, industrial and vacant land that surpasses a threshold set by your state. 

In NSW, land tax only applies to properties with a value exceeding $822,000, with a flat rate of $100 plus 1.6% of any amount that exceeds $822,000. This would mean property worth $1000,000 in NSW would yield an annual land tax of $100 + (1.6% x $178,000) = $2948.

However, in NSW this rate can drastically increase with properties worth over $5,026,000, which bear a flat rate of $67,364 and 2% additional charge on any amount of that threshold. 

To avoid any financial or legal penalties, It’s important to ensure you’ve paid off any land tax owing on the house before selling your investment property. 

GST on an investment property

In most cases of selling an investment property, GST is not required to be added on top of your sale price. 

This only applies to sales of newly built or redeveloped properties. 

How to avoid capital gains tax

If you meet criteria, you can in fact avoid capital gains tax after selling.

Check your property’s date of purchase 

If you acquired your property before 20 September 1985 you will not have to pay any capital gains tax when selling. Assets purchased before this date are exempt as they came before the date that CGT was introduced. 

You can read more about this here.

Selling a primary place of residence (PPOR)

If you're selling a home that’s served as your primary residence for a minimum of 6 months from the settlement date, you could qualify for an exemption from capital gains tax. 

To qualify the property as your Primary Place of Residence (PPOR), you must meet the following criteria:

• Resided in the home for a minimum of 6 months
• Used the home's address for receiving postal mail
• Had the home's utilities registered in your name
• Stored your belongings at this residence
• Maintained continuous residence in the property since its purchase

This rule acknowledges that your primary residence is generally not intended as an investment property for profit but is instead the place where you and your family live and make your home.

6-year rule capital gains tax exemption 

The 6-year rule in Australia offers a unique tax advantage by allowing you to designate a property you own as your primary residence for taxation purposes, even when you're not currently residing in it. This special provision means that when you decide to sell the property, you may be exempt from paying capital gains tax on any profits resulting from the sale.

Under the 6-year rule, you can continue to benefit from the capital gains tax (CGT) exemption for up to six years, even if you choose to rent out the property during this period. Ideally, it's advisable to complete the sale within this six-year timeframe to enjoy a tax-free transaction.

This rule serves to help individuals who are unable to occupy their home due to various reasons, such as work commitments or extended travel, allowing them to avoid the burden of additional taxes when they eventually sell the property.

It's essential to note that you can only apply this rule to one property at a time, and you should be able to demonstrate a legitimate reason for not residing in the property, such as work-related travel or commitments.

Claiming depreciation on an investment property

Claiming depreciation on an investment property is an essential aspect of maximising your tax benefits as a property investor in Australia. Depreciation refers to the gradual wear and tear of assets within the property, and this wear and tear can be claimed as a tax deduction. 

There are two main types of depreciation you can claim:

Building depreciation

This covers the wear and tear of the structural elements of the building, such as walls, floors, and roofs. Building depreciation is typically claimed on a diminishing value basis and can be spread over the effective life of the building.

Plant and equipment depreciation

This relates to the wear and tear of removable and mechanical assets within the property, such as appliances, air conditioning units, and carpet. Plant and equipment depreciation can be claimed over their effective life, typically on a prime cost basis.