How to lower capital gains tax when selling your property

Key Points

• Capital gains tax is a government charge on the profit of a property sale.
• Some eligible property sales can pay lower, low, or no capital gains tax. 
• A tax professional is an important expert to consult when selling your home.

If you’re planning to sell a property, it can be a bummer to pay capital gains tax on any profits. But did you know there are ways to lower your capital gains tax, or even avoid paying it altogether?

When it comes to tax issues, it’s always a good idea to seek advice from a registered tax agent or accountant. But let's run down the key facts to know about how to lower capital gains tax when selling your property.

Capital gains tax is the tax paid when an asset, such as a house or unit, is sold for a profit. It was introduced in Australia on 20 September 1985 and applies to all assets that were acquired since then (though there are some exceptions).

When you sell an asset for more than you paid for it, the difference is considered a capital gain. Unless you’re eligible for an exemption, this amount must be declared in your tax return for that year. This can significantly increase your taxable income.

However, if an asset sells for less than you paid for it (i.e. you had negative equity), the difference counts as a capital loss.

While you can't claim a capital loss against your regular income on your tax return, you can use it to offset any tax paid on any capital gains – even future ones.

There are a few exemptions to capital gains tax that may be available to you. But even if you don’t qualify, don’t fret. There are still ways to reduce the size of your tax bill. 

 The main ways to reduce capital gains tax are, in brief:

• Noting the date of purchase.
• Using the principal place of residence exemption.
• Using the temporary absence rule.
• Utilising your superannuation fund.
• Increasing your cost base.
• Holding the property for at least 12 months.
• Selling during a low-income year.
• Investing in affordable housing.

Let's break down what each of these means. 

If your property was acquired before 20 September 1985, it will be exempt from capital gains tax. This means you won’t have to pay tax on any profits, but you won’t be able to use any losses to reduce your assessable income.

You can generally expect to receive a full exemption from capital gains tax if you and your family have lived in a property since purchasing it, it hasn’t been used to generate any income, and it sits on land of two hectares or less.

More broadly, the ATO will consider a property your main residence if it meets the following criteria, though different weight will be given to each depending on individual circumstances:

• You and your family live in it.
• You keep your personal belongings in it.
• It's the address your mail is delivered to.
• It's your address on the electoral roll.
• Services such as energy and gas are connected.

But even if you move out, change your address on the electoral roll, and relocate your personal belongings, a property can retain main residence status indefinitely so long as it’s not used to produce income, such as rental income. When you sell, you’ll be eligible for the main residence exemption from capital gains tax.

If you use a property you no longer live in to generate income, such as by renting it out, the ATO will allow you to continue treating it as your main residence for up to six years. In this case, however, you’ll only receive a partial main residence exemption.

During this period, you won’t be able to treat any other dwelling as your main residence, except for a limited time if you’re moving to a new home.

If you purchased an investment property through a self-managed super fund and have held it for at least 12 months, you can take advantage of some pretty generous tax benefits.

For example, your capital gains tax will be discounted by a third if the sale takes place during the accumulation phase. And if you sell the property during the pension phase, you won’t have to pay capital gains tax at all.

One way to reduce the amount of capital gains tax you pay is to increase your property’s cost base. The cost base is the money required to acquire, hold, and dispose of a property. The cost base is subtracted from the selling price to give you your capital gain.

According to the ATO, the cost base of a capital gains tax asset is made up of:

• The money you paid for the asset.
• The incidental costs of acquiring the asset, such as stamp duty and property valuation fees.
• The cost of owning the asset.
• Capital costs to increase the asset’s value, such as renovations.
• Capital costs of preserving or defending your title or rights to the asset.

Increasing the cost base can be done by including things like stamp duty, loan application fees, and conveyancer’s fees when lodging your tax return. Make sure to keep records of all your property-related expenses to substantiate your return. 

Any properties bought and sold within 12 months will be taxed at the full capital gains tax rate. But if you hold onto a property for longer than 12 months, you can reduce your capital gain using either the discount method or indexation method.

The capital gains tax discount method applies a 50% discount to your capital gain. So if a property sells for $200,000 above its cost base, only half of that amount ($100,000) will be added to your taxable income.

The indexation method is a bit more complicated and can only be used if you acquired a property before 21 September 1999. It allows you to convert the original cost of a property into today’s money by applying an indexation factor based on the Consumer Price Index.

If you know your income will be lower next financial year, delaying the sale of a property until then will lower your marginal tax rate and reduce your CGT liability. This requires a bit of planning and foresight, but if done right it could save you a pretty penny.

On 1 January 2018, the government introduced an additional 10% capital gains tax discount for those who invest in eligible affordable housing, bringing the maximum discount up to 60%. 

For your property to qualify, it must be rented to low or moderate income tenants at a rate below the private market rental rate. It must also be managed through a registered community housing provider and held for at least three years in total.

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