How to Save Capital Gains Tax on Investment Property (Part I)
Below are some ways in which CGT may be reduced on the sale of an investment property. But before you decide to sell you should properly work out what the potential size of the capital gain will be. Once you know what you are dealing with you will then be able to work out appropriate strategies to reduce the amount of tax payable.
1. Timing of the sale
Usually it is the date of the contract entered into that is the relevant disposal date for CGT purposes. Some things you can do:
a) Bring forward the sale so that it falls into a year of low income, or
b) Push back the sale so that if falls in a later year where you expect to have lower than usual income. Delaying the sale can also allow for more time to plan and implement other strategies.
c) Time the crystallising of losses (see below)
d) Make sure you have held the property for the full 12 months for the 50% CGT discount
2. Offset Capital Gains with Capital Losses
Capital Losses can be used to offset capital gains. Losses can result from:
a) Carried forward losses from prior years, or
b) Current year losses arising from the sale of other assets.
Bring forward the sale of other property or shares that have dropped in value may help. But you have to get the timing right. Selling the shares with the capital loss in a later tax year to the sale of the property with the capital gain will result in no offsetting and the capital loss being carried forward to be offset against some future potential capital gains.
Take care with the sale of shares and then immediately buying them back as the ATO may want to deny the deduction as they can deem this to be a wash sale with the sole purpose of a tax benefit.
3. Claim everything possible
When working out the capital gains tax the cost base of the property needs to be worked out. Various expenses incurred during ownership can be used to reduce the amount of CGT payable. So it is essential not to miss any potential deduction as this will result in more tax being payable.
See my tax Tip on this: Tax Tip 76: Calculating the Cost Base for CGT purposes.
4. Small Business Concessions
Often overlooked are the small business concessions which may be used to reduce the CGT (sometimes to nil) where the property has been used as part of a business.
There are 4 main small business CGT concessions, namely:
a) the small business 15-year exemption
b) the small business 50% active asset reduction
c) the small business retirement exemption and
d) the small business rollover
@MikeLivingTheDream first gave me the idea of using the 4 small business concessions.
5. Reducing your Taxable Income
Any capital gain is added to your other taxable income for the year so look at ways to reduce your income. There are 2 aspects to working out taxable income:
a) Earnings, and
Either reducing earnings or increasing deductions will result in less tax, Combine the 2 and your savings will be greater still.
5a. Reduce Earnings
Not many would want to reduce their earnings, but here are some suggestions for those that do:
• Taking that leave without pay that you always wanted may work in well with reducing your earnings;
• Salary sacrificing into super can also reduce your taxable income;
• Change from full time to part time;
• Quitting to travel the world.
• Where self-employed you may be able to delay income.
• Salary sacrifice into super
See Taking a Year off Work to save CGT
Before prepaying interest, you should consider the flow on effects for later years – where you will have little to no interest claimable which may result in more tax payable. Also, be aware that you cannot just pay into the loan, but must actually fix the loan for 1 year and
5b. Increase Deductions
Having greater deductions will mean you have less taxable income. Some ways to increase deductions, other than the usual claiming everything you can, are:
• Prepay interest on other investment properties
• Deductible contribution into super where possible.
6. Die in your investment property
As you approach death move into your investment property with the biggest gain and rent out the main residence.
Usually, it is difficult to get the timing right on this one!
Stay tuned for Part II