Capital gains tax (CGT) is a complicated concept that confuses even some of the most experienced real estate investors. However, it can have a big impact on the funds you pocket when selling property assets.
If you’re planning to sell a home or land sometime in the future, it’s best to know when you’ll need to pay capital gains tax and ensure this is part of your investment planning and portfolio management process.
If you sell a capital asset like real estate property, you will usually make either a capital gain or capital loss. If you made a capital gain on your investment, you’ll need to pay capital gains tax on that amount as part of your taxable income.
But when does CGT need to be paid on a house or property sale? Is it when the sale is closed, at settlement, or another time altogether?
When you sign a contract to sell your property, you will be subject to capital gains tax, which will be applied in the same financial year that the property is sold. As a result, you will have to pay CGT the next time you file your income taxes. However, the sale can be CGT exempt under certain conditions.
To maximise their return on investment, investors should understand capital gains tax before they begin investing in property. Luckily for you, this article will let you in on everything you need to know when it comes to paying your capital gains tax on property sales.
Keep reading to learn more about when capital gains tax is due.
Table of Contents
What Kind Of Property Does Capital Gains Tax Apply To?
Any capital asset, like real estate and shares in investment properties, may require capital gains tax to be paid when it’s sold. If you have an investment property that you rent out or are waiting for it to appreciate, this is likely to be a capital asset, meaning CGT would apply.
The ATO publishes a list of capital assets and exempt assets to help you determine which category your property falls into. This is because tax treatment is different depending on whether the property is considered an investment property, rental property or primary residence. This can factor into key property portfolio management decisions, like whether you should sell a rental property.
Capital gains tax typically applies to rental properties as well as investment properties that are not rented out.
The amount of tax you will need to pay will depend on how much profit you make on the property – essentially, the difference between how much you paid for the house and how much you sold it for. It’s also possible to make a capital loss, which can be offset against other capital gains, but not against your overall taxable income.
There are some capital gains tax exemptions in Australia you may be eligible for:
- Personal or Primary Residence Exemption
Your primary residence describes the property where you reside, which is usually the home you and your family live in, and it’s entitled to a total CGT exemption. As long as you and your family live on the property, you have personal belongings there, it’s the address where your mail is delivered and it’s connected to utilities under your name—it’s considered your primary residence. Therefore, it’s exempt from capital gains tax. Check with your financial advisor if you’re uncertain what counts as a primary residence.
- The Six-Month Rule
A property can potentially be exempt from CGT if the owner acquires a new home before selling their previous primary residence. For this exemption to apply, two conditions must be met. First, the property must have been your primary residence for at least three months within the 12 months before selling it. Secondly, you must not have used the property to make assessable income in any way within the 12 months before selling.
- The Six-Year Rule
If you move out of your primary residence and decide to rent it out, you can still claim an exemption from CGT if it’s sold within the first six years. It’s always possible that you have considered a rental property your primary residence intermittently – so if you vacate the property again, the six-year period begins again.
- The 50% Rule
If you have a capital asset that you sell, you’ll be left paying the full rate of capital gains tax if you sell it within 12 months of purchase. However, you’ll receive a 50% discount on your capital gains tax simply by holding onto it for at least 12 months, after which you can sell it and receive the 50% discount.
Some assets will depreciate quicker than others. Deciding if it’s financially better to sell an asset earlier or if it’s better to wait until after the 12 months, at which point the asset may have depreciated more, will depend greatly on the asset itself.
- Retirement Exemption
There are select CGT exemptions for retirees: if you own an active business asset and are about to retire, you may also claim an exemption from CGT on your capital property. If you are over 55, you may be exempt from up to $500,000 of capital gains tax. If you are under 55, you’ll need to put the proceeds into a superannuation account or eligible retirement savings to qualify.
- Prior to 20 September 1985
Assets purchased before CGT was introduced in 1985 do not require capital gains tax to be paid on the sale.
Unsure which CGT exemptions may apply to you? The ATO also provides a Capital Gains Tax property exemption tool to help you understand your eligibility.
An expert financial advisor can also help you navigate these regulations, so if you’re planning to sell a house or investment property, it’s worth getting specific advice for your situation.
Do You Pay Capital Gains Tax At The Closing Or Settlement?
You don’t need to pay your capital gains tax right after selling the property. While the CGT event will be triggered when you sign a contract to sell your property, you won’t need to pay it until you file your taxes at the end of the financial year.
For example, if you make the sale on or before September, you will need to pay the CGT in July of the following year. If you don’t want to pay capital gains tax so soon, you can hold off and make the sale after the fiscal year ends—so the assessable income will apply to the next year’s income taxes.
The date of sale refers to when you signed the contract and not when you decided to settle. For example, if you signed the contract to sell in June 2021, you are liable to report and pay the CGT in your 2020-2021 tax return.
Put simply, you don’t need to worry about paying the CGT as soon as you make the sale of your property – but it might be a good idea to hold on to the money until you need to pay the required amount at tax time.
How Long After I Sell My House Do I Have To Pay Capital Gains Tax?
You will need to pay the capital gains or capital loss at the end of the financial year. Some people think you need to pay the tax immediately after settling, but that’s not the case. You are only obliged to pay the CGT when you file your taxes, at the end of the financial year in which you signed the contract of sale.
Is Capital Gains Tax Automatically Withheld?
No, capital gains tax is not automatically withheld. However, that doesn’t mean you can avoid paying it or reporting it on your income tax return. Withholding or providing the wrong information to the Australian Tax Office is a very serious offence.
Instead, you can find legal ways to reduce your capital gains tax, including capital gains tax discounts and exemptions you may be eligible for. You may also be able to plan your asset sale to minimise (or avoid) capital gains tax.
If you’ve owned the taxable property for more than 12 months, you could get a 50% discount on your CGT, which is especially helpful if property values have significantly increased since you bought the property. You can also receive a CGT exemption if you can prove that the property is your primary residence.
But take note that since CGT is not automatically withheld, it’s a good idea to set aside the money you need to pay the CGT next time you file your income tax. While you don’t have to pay capital gains tax immediately, it’s important not to overlook it when reinvesting the funds you make from an asset sale.
What Is The Best Time To Sell A Property for Capital Gains Tax?
As capital gains form a part of your assessable income, the best time to sell it would be a year in which you made the lowest income. This is because capital gains are taxed at your overall income tax rate.
If you earned more in a particular financial year, you’ll likely pay a higher rate of tax on your capital gain for that year. However, rolling over a capital loss can also mitigate the impact of selling a capital asset in a higher-income year.
On the other hand, if you have a lower taxable income that year, you’ll pay a lower CGT rate if you fall into a lower income bracket. If you have the freedom to time a property sale wisely, you may be able to avoid paying a higher rate of capital gains tax. However, uncertainty in the property market means any decision on when to sell should be carefully weighed up.
Capital losses can be offset against any capital gains in the same financial year – and if you make a capital loss without a gain to offset against, you can roll over the loss for a future tax year. This is another important consideration when it comes to timing the sale of a capital asset.
It can also be a good idea to hold off on selling your investment property if you haven’t yet owned it for 12 months. This is because, after 12 months of owning a particular investment property, you can claim a 50% discount on your CGT—whether it’s a house you rent out or a house you are waiting to appreciate.
This rule applies to any investment property, so consider holding on to any of your investments for at least 12 months to reduce your capital gains tax by 50%.
For personalised advice, always consult an investment financial planner who can take all variables into consideration.
How Does The 12-Month Ownership Rule Affect CGT?
The 12-month ownership CGT discount means that property assets held for more than 12 months are eligible for a 50% discount on the CGT on your property.
What Is My Main Residence For Capital Gains Tax?
Your primary residence is exempt from CGT. It will only be considered as your primary residence if:
- You and your family dwell on the property
- You have personal belongings in the household
- It’s connected to your water, power, phone, and other utility bills
- It’s the address where your mail is delivered
- It’s the address where you’re registered to vote
Read the ATO guidelines on primary residences here.
Need Expert Advice on Capital Gains Tax?
The expert financial advisors at WealthVisory Private Clients are here to help. We have many years of experience helping Mandurah, WA locals manage their investments effectively. Our professional team can give you the advice you need on the best time to sell property, and help you meet your tax obligations.
Whether you need help with CGT exemptions or advice on managing your property investment portfolio, let our knowledge benefit your future wealth.
Book an appointment with WealthVisory Private Clients.
This article is provided as general information only and does not consider your specific situation, objectives or needs. WealthVisory Private Clients makes no warranties about the ongoing completeness or accuracy of this information. It does not represent financial advice upon which any person may act. Implementation and suitability requires a detailed analysis of your specific circumstances.
Matthew has a wide ranging background in business, finance, taxation and accounting with over 25
years’ experience, firstly as an Accountant before becoming a Financial Planner. Matthew has been in
the Financial Planning Industry since March 1998 and has been the principal of his own financial
planning practice since 2003.
Matthew has studied a Bachelor of Commerce degree from Newcastle University majoring in Financial
Accounting and the Diploma of Financial Planning from Deakin University. Matthew is a Registered Tax
Agent and is a member of the National Tax & Accountants Association (NTAA).
Matthew has particular expertise in the areas of retirement planning, superannuation, investments and
insurance. His emphasis is on building a professional, integral and lasting relationship with clients with
the objective of assisting them to achieve their financial and lifestyle goals.