Legal ways to reduce your tax on selling a property

It's not as simple as collecting the money and leaving when it comes to selling a property. You may be subject to hefty capital gains tax (CGT) charges, depending on your income and the length of time you've owned the property. That means you're getting rid of a revenue-generating asset and spending a lot of money to do so.

When selling an investment property, there are various strategies to avoid paying capital gains tax. These are all legal ways to lower your tax bill, so you have every right to take advantage of them. Let's take a look at some different strategies to reduce your capital gains tax, along with some examples.

How to avoid capital gains tax in Australia?

Take advantage of being a landlord:

If you live in the property immediately after buying it, it might be classified as your primary residence. As a result, it is not subject to CGT.

Note that if you rented the property out then moved in later, you wouldn't be able to do this. However, you are eligible for a partial exemption based on the number of "years lived in" versus "years rented."

For example, suppose you rent a house for three years before deciding to move in and live there for the next six. After that, you are selling a property for $AUD100,000. Your taxable income will be $AUD33,333 or one-third of your total earnings. To put it another way, you're only taxed on the three years you rented out the house out of the nine years you owned it.

Wait a year:

Those who have held a home for at least 12 months can get a 50% tax break on any profit they make.

Example:  In 2020, you purchase an investment property and intend to sell it for a profit of $AUD120 000. You can decrease the taxable value by half because you've held the property for more than a year, making it $AUD60 000.

Before renting out a property, get it evaluated:

The difference between the ultimate sale price and the property value when it was rented is used to calculate capital gain. Before renting it out, hire a professional appraiser who will offer you a new cost basis to estimate potential future payments.

For Example: suppose you spend $150,000 on the house and stay in it for ten years. You get the house revalued at $AUD450,000 after this period and then rent it out. You sell the property for $AUD480,000 two years later.

This indicates you made a $AUD30,000 taxable capital gain. However, your taxable income would be significantly lower if you were to subtract the gain from the property's initial price of $AUD150,000 before revaluation.

 Make use of exemptions such as the 6-year rule:

You can get a complete capital gains tax exemption if you rent out your home for six years or fewer, as long as you don't utilize another property as your primary residence.

This is known as the "6-year rule," however it does not relate to a calendar year. Instead, it solely pertains to the amount of time a renter occupies your property. So, if you rented a home for eight years but it was empty for many months totaling two years, you're still qualified for this deduction.

For example: suppose you buy a house for $AUD500,000 and move in right away, designating it as your PPOR. You travel overseas after a year and have the house revalued at $AUD600,000. Then, after eight years, you return home and sell the house for $AUD900,000.

Make use of an SMSF house loan:

You can buy a house with a self-managed super fund and a separate SMSF property home loan if you're a member of one. However, it's important to note that you can't stay in the house until you're qualified for a pension.

You can be selling a property you bought with your SMSF after you retire and avoid paying capital gains tax.