How to pay less tax when you sell a property
Many people invest in property as a way of building wealth and, like all assets, there often comes a time when they need to be sold. And selling assets can cost you in the form of TAX!
If you have lived in your own home – or principal place of residence (PPR) – for the entire time you owned the property and you’ve had no other property during that time, the sale for that property will typically not attract Capital Gains Taxation (CGT).
For the sale of other types of properties like rental properties, holiday homes or land, you may be slugged CGT.
The importance of keeping records
Keeping valid and accurate records from the time you purchase the property is essential, particularly when the time comes to sell the property and calculate capital gains tax (CGT).
Records you will need to keep are:
- Purchase documents (conveyancer’s settlement statement)
- Contract for sale (for CGT, the date of the contract, not settlement is when we calculate any gain and taxation)
- Settlement statement on sale
- Records of capital improvements
- Any depreciation claimed
- For properties purchased after August 20 1991, the cost base of the property can be increased items that were not claimed as a tax deduction ie periods when not rented including expenditures such as interest, taxes and rates.
Part rental/part residence
If you’ve lived in your property for a while and then rented it out, you may be able to claim an exemption for the period of time it was your PPR.
To minimise any tax liability, make sure that the property is valued at the time that you move out (it ceases to be your PPR). This is particularly useful as many owners do not retain records of property improvements whilst it is their residence.
Relocation for up to six years
If you have to move out of your PPR (e.g. for work relocation) and don’t own another property which you claim as your PPR, you can rent out your property for up to six years, then move back into it and claim an exemption from CGT for this period.
After you have finished renting the property and are getting ready to sell it, the cost of repairs you need make to the property may also be deductible even though the property was previously your PPR.
If you no longer rent the property, the cost of repairs may still be deductible provided:
- the need for the repairs is related to the period in which the property was used by you to produce income, and
- the property was income-producing during the financial year in which you incurred the cost of repairs (i.e. you must have spent the money before 30 June).
Another option for reducing the tax payable on the sale of your asset is to voluntarily put money into superannuation and claim the payments as a tax deduction against the gain. Be aware though, you will need to consider any other superannuation contributions you have made including employer and superannuation limits for this to be of value.
Timing of the sale
When you sell the property can have a major impact on your CGT. For example, if you are planning to retire and will have no taxable income in future years, delaying the sale may enable you to take advantage of the lower taxation rates.