Let’s first start with what a capital gain is. A capital gain or loss is generally the difference between what you paid for an asset you purchased and what you eventually sell it for.
If you sell it for more than it cost you to buy, then you’ve made a capital gain. If you sell it for less than you bought it for, then you’ve made a capital loss. Capital Gains Tax (or CGT for short) is the tax you must pay on the gain when you sell the property.
Will I pay Capital Gains Tax if I sell my owner-occupied main residence?
Generally, no. If you live in the property, it’s your main residence and you don’t use it to generate income, then you are exempt from paying Capital Gains Tax. Here’s the link to the ATO outlining the ins and outs on this.
However, it’s important to always seek advice from your account or tax specialist before you buy or sell property to understand what the tax implications might be for your individual situation.
Do I have to pay Capital Gains Tax if I sell my investment property?
As a rule, if a property has been used to produce income whether through renting it out or operating a business from it, then you must pay Capital Gains Tax. There are some exemptions to this, which we will talk about in a future article.
To keep it simple, if you have purchased an investment property and never lived in it then you’ll probably have a CGT bill when you sell it.
Here’s a simplified example of what Capital Gains Tax could look like
You buy an investment property (which you never live in and rent out for income) for $500,000 – inclusive of stamp duty and other costs. You then sell the property for $800,000, making a capital gain of $300,000. It gets more complex if you have owned the asset for greater than 12 months, as a 50% CGT discount is available for Australian residents.
In our above scenario, assuming you owned the property for more than 12 months, then your capital gain is reduced to $150,000. CGT is then payable at your marginal income tax rates.
If you earn $100,000 per year, then your normal tax liability is $24,187. However due to the $150,000 taxable portion of your capital gain, your taxable income increases to $250,000. Tax payable on $250,000 is $88,167. This means the tax payable on your $300,000 capital gain is $63,980 (i.e. $88,167 – $24,187).
Note, we have simplified the case facts in our example by assuming there are no capital allowance tax deductions or capital improvements throughout the ownership period.
Always seek advice first before making a decision
There are of course many different scenarios when it comes to buying and selling property. A CGT event can be triggered in a range of different situations so it’s important to chat with your accountant first to understand what the implications might be.
This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the information is suitable for you and your personal circumstances. You should always seek advice from qualified tax and finance professionals before making a decision.