Minimise tax on your investment property

New Law

As most of us are aware, record-low interest rates have stimulated somewhat of a property boom in Melbourne and Sydney over the last year, and to a lesser extent Brisbane as well.

Property investors, owner-occupiers wanting to upgrade and aging baby boomers keen to cash in their nest egg and sell while the going is good is in line with the age old saying ‘buy in gloom, sell in boom’.

Capital gains tax is always lurking however, keen to sink it’s teeth into any cash payment, so here’s ten ways to minimise your tax burden when you sell your property.

1. Principal place of residence

This is one of the best-kept secrets of avoiding CGT. You can live in your property, then let someone else live in the same property but still claim it as your PPOR for up to six years.

General manager of Christopher Lane told Domain that generally speaking your property was not your main residence once you had moved out.

“However, there are circumstances where you can treat a property as your main residence after you’ve moved out for the purposes of avoiding CGT, under the CGT main residence exemption,” he said.

“For a period of up to six years, you can treat your property as your main residence if you satisfy the eligibility criteria.”

The six-year rule was made to allow for those who have job transfers interstate or overseas, but you could still technically move to the next suburb.

Damian Collins from Momentum Wealth told Domain that just because you rented out your property, it didn’t mean you had to relinquish it as your PPOR.

“If you rent it out, you get all the benefits of interest deductions and potentially, depending on the debt, the benefits of negative gearing,” he said.

“If you buy another property you then have a choice. You can choose which one is your primary residence and you don’t have to choose until you sell it.”

The obvious benefit here is that if you own two properties, the one with the highest CGT can be claimed as your PPOR. 

2. Keep your investment for over 12 months

Anyone who buys an investment property is better off keeping it for over a year, because if they do, CGT is cut by 50 per cent.

This reduced amount is added to the owner’s normal income and taxed at the marginal tax rate.

3. Good timing 

The timing of when you incur CGT is critical to getting the best outcome. Everyone has good and bad years and income often reflects personal circumstances. Things like maternity leave, long overseas holidays and gaps between job contracts present good opportunities to capitalise on low-income years and selling out while you’re in a lower than usual tax bracket.

4. Delay the contract date 

If you’re keen to sell during the immediate boom, it could pay to wait until July 1 next year, the start of the new financial year. This would save you a whole financial year of payable tax. 

You can also put the profits from the sale into an offset account which reduces the tax payable on other mortgages in the meantime.

5. Go in with a partner

If you own 100 per cent of a property, you also have to pay 100 per cent of the CGT.

If it’s a long-term investment, put the property in the name of the person where the tax benefits are greatest now.

If your investment property is positively geared, it could be a good idea to purchase it in the name of the person with the lower income, and vice versa if the property is negatively geared.

6. Sink profit into your super

When you sell, it’s worth considering putting some of the profits into your super. It’s similar to salary sacrificing and you won’t be taxed as much.

7. Purchase in a trust

This is where you purchase a property with a number of people in a discretionary trust, and it can benefit those on lower marginal tax rates.

Mr Lane said anticipating your individual financial circumstances into the future can be almost impossible.

“A discretionary trust allows many of those decisions to be made closer to the sale event and the outcome better planned, which produces better tax outcomes,” he said.

“ It allows you to decide which of the members of the trust will receive the profit from the asset sale. It means you can direct the profits to the most tax-effective person at that time. 

8. Sell both good and bad

If you sell your property in a booming eastern suburbs in Melbourne for a healthy profit, it might be a good idea to offload your other property somewhere else that hasn’t done so well.

Let’s say your Melbourne property made you $200,000 but your dud in Perth lost you $50,000, your taxable profit comes down to $150,000 if you sell both. 

9. Claim deductions

Claim all of the common deductions such as rates, insurance, body corporate and strata fees and renovation costs. There are some less common deductions you can also keep your eye on. These include writing off any borrowing expenses which includes lender’s mortgage insurance, property advertising costs and also the costs associating with initially investigating the property purchase.

10. Pre-pax tax on another property

If you actually have the cash to do it, you can pay your mortgage fees on a second property one whole financial year in advance. 

For example, if property A is sold for a profit of $200,000, the interest on property B could be pre-paid for one financial year. This might cost $50,000 and reduce the overall taxable gain across a property portfolio.


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