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How to avoid Capital Gains Tax

How to avoid Capital Gains Tax

No one likes handing over capital gains to the tax man so understanding how to use the rules to be exempt is a blessing for many investors in the know. With the success of many investments judged on the final profit it can make a big difference to your strategy.

Any assets purchased before the 20th September 1985 is not subject to Capital Gains Tax (CGT). For everything after, the tax is based on the difference between the selling price of an asset and the cost base. For property the cost base includes the purchase price plus any costs in acquiring, holding and disposing of the dwelling.

Any capital gains are added to taxable income and charged marginally. However, if you have owned the property for more than twelve months then only 50% of the gains are required to be declared. In the case of a capital loss, you can use it to reduce any capital gain you made in the same financial year. If you did not make a capital gain a loss can be used in another year when you do make a profit to decrease that amount.

Your main place of residence is exempt from CGT but the catch is you can only claim the one property. The only time this does not apply is when there is a six month overlap when you move homes. This doesn’t have to be the current dwelling you live in so there are opportunities for investors to maximise their profits by taking advantage of the following rules.

If you have lived in a property for a reasonable amount of time since purchase but want to rent it out, then it can still be claimed as your main place of residence for up to six years after you move out. The drawback being that you cannot claim your current home as the main residence. If you do move but don’t claim the previous property as the main residence then it will be subject to CGT, but only for the period subsequent to you living there.

If you are constructing or renovating a property you can still claim it as a main place of residence even if you cannot live there. The “pre-occupation exemption” is applicable for four years as long as you move in as soon as possible and live there for three months. Again it can be the only main residence you claim in this period.

It’s important to keep records of your investment assets from the time you receive them. Incomplete records could mean paying more tax than required when you dispose of an asset. You need records of when you acquired an asset, its value at that time and any other costs associated with acquiring it.

There is no need to fear capital gains tax when you know how to avoid it. Selecting the right property to make your main residence can make a big difference on your financial position. There aren’t many significant tax breaks available for investors so detail a strategy for your portfolio to understand which dwelling will give you the greatest returns.

If you need help financing your strategy make an appointment with one of our experts on 08 9242 3300 or email info@nullrdfinance.com.au.