What Is Capital Gains Tax

The value of an investment property can rise over time, which is known as capital gain. The way the gain is taxed may be complex but it’s worth understanding how this tax could affect you as an investor.

Capital gains on investment properties can be significant.

When selling an investment property, you may be required to pay capital gains tax (CGT). Depending on how the property was purchased and how long you held it for, CGT may be assessed and calculated in different ways. However, there are a few ways to minimise how much CGT you will be required to pay.

Reducing capital gains tax

When you buy an investment property, the Australian Tax Office (ATO) adds costs like stamp duty and legal fees to calculate the total purchase price. If you sell your property, selling costs like legal fees and agent’s commission may be deducted from the sale price.

As you calculate your capital gain, it’s important to keep track of every purchase cost and selling expense. Keeping a tight grip on receipts and staying on top of exactly how much you’ve invested in the property can help you trim your capital gain.

The amount of capital gains tax you pay is tied to your personal income, so you’ll pay CGT on your capital gains at whatever tax rate you pay within your income bracket.

Completing your CGT return can be complicated, so it’s a good idea to speak to a tax professional. They can help you understand which exemptions may be available to you.

Estimating the ROI of your investment property

Understanding the calculation of returns is essential for comparing how your investments perform with those of other potential investments. A rental property could earn rental yield (income) plus capital growth (how much the property’s value rises). These numbers added together make up the property’s total return.

You can determine an investment property’s gross yield by dividing the annual rent by the property’s value and multiplying the result by 100. For example, if your property is worth $500,000 and you receive annual rent of $26,000, the gross yield will be 3.12% (that’s $26,000 divided by $500,000 x 100).

Capital growth is the increase in a property’s value over time. A property has achieved capital growth of 5% if, for example, it was worth $600,000 at the beginning of the year and its value rose to $630,000 by the end of the year.

A My LMI Group broker can help you determine whether investing in property is the right financial decision for you.