Get yourself up to speed on the main types of taxes when it comes to property investment and how these affect your potential profit.
The first type is one we’re all very aware of, as we pay it whenever we earn money, is Income Tax. That is a portion of the income you derive from employment, or investment or any other form of taxable payment you receive from any source.
The second tax that impacts property investors is Capital Gains Tax (CGT). As we all know, a good property investment will appreciate in value over time. When you sell the property, the amount it has increased by since you purchased it (i.e. the capital gain) is subject to capital gains tax.
CGT is payable on any property you sell where the capital gain itself is more than $30,000, except when it’s your own home (primary residence).
So, how much tax do you pay?
In other words, if you sold a property after achieving a capital gain of $50,000 more than 12 months after the initial purchase, the applicable CGT would be calculated on a capital gain of $25,000.
The applicable rate of CGT is the same as income tax, however if you own the investment property for more than 12 months, you get a 50% discount on the capital gain.
Structuring your portfolio in the correct way can greatly reduce the amount of income tax and CGT that you might have to hand over to the government.
What is excluded from CGT?
Specific exclusions include your family home, your car and most of your personal use assets including items such as furniture.
If you move out of the home for up to six years, you may still find yourself exempt from capital gains tax. But if you rent out part of your home or use it as an office and claim a tax deduction for it, you may find you need to pay CGT on a portion of your capital profit.
It’s also worth consulting your accountant before selling any asset and especially if you’re planning to sell near the end of the financial year so you understand when CGT will be payable.
This is important, as it is based on the date on the contract of sale, not settlement date, which can be some months later.
Of course you’ll make your life a lot easier if you keep accurate records including the acquisition date when you bought the property), how much you purchased it for and all the associated acquisition costs which make up the capital base (the starting point for working out the sums.)
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