In 2020, property prices in Australia rose 3.6% when they were predicted to fall almost 20%. This has created something of an imbalance that the government is attempting to fix. To that end, some members of parliament have proposed taxing owner-occupier houses sold for more than $2 million at 20% capital gains.
We’ll look at the basics of capital gains tax, whether it will happen, and how you can prepare.
Capital Gains is a type of tax based on how much was made off an asset. So if you buy stock for $1 and sell for $1 million, you’d pay taxes on the difference. The formula gets a little tricky with homes because you have to factor in everything from closing costs to sales fees, but the concept is the same.
When you file your tax return, you’re allowed to deduct any capital losses from your capital gains. So if you sold two properties, one for a loss of $30,000 and one for a gain of the same amount, you wouldn’t pay any taxes at all.
Right now, the goal in Australia is to limit how much owner-occupied homes face in capital gains tax. The following applies mainly to investors.
Capital gains for a property starts with the 12-month ownership rule. If you bought and sold your property within one year and sold for a profit, that gain will be tacked onto your taxable income. However, if you’d owned your home for more than a year, you’re entitled to a 50% discount on your capital gains. So if your gains were $20,000 after two years of ownership, you’ll only pay taxes on just $10,000.
If you owned the property prior to 21 September 1999, the rate of capital gains is based on the indexation method. This takes into account inflation, which will also decrease the total amount you pay in tax.
Online estimators can help you get a rough idea of what you’ll pay, but talking to a financial expert will be able to give you a better idea of your actual dollar figure.
Eliminating the capital gains exemptions will augment income taxes on everyday Australians. The idea is that the property market in Australia is skewed towards investors right now, and that this needs to be corrected. Less than 40% of all Australians in their 30s are ready to enter the housing market and that number only dwindles by the day.
Capital gains on expensive properties safeguard against extremely low-interest rates and inflated property values.
The idea is to level the playing field here by taxing more owners of high-value residential properties.
Many have emphasised that the federal government’s housing policy is somewhat skewed towards multiple property owners, rather than making sure more Australians had access to safe housing. Many people are being forced to rent, leading to rental prices increasing and more families facing debt or homelessness. The current social housing waitlist is continuing to pile up. These new policy changes are aimed to improve the housing sector and allow more younger people to own homes based on the benefits of the proposed laws.
In February 2021, property sales and stamp duty revenue was as high as they’ve ever been, causing people to speculate that capital gains tax might be the answer.
However, the reality is that it would be a difficult change to push through at a political level. This doesn’t mean that there won’t be adjustments made to help keep Australians aligned with other tax systems around the world though. Some have proposed pushing property taxes to more closely mirror those on superannuation.
It’s important to keep in mind that you are not required to pay capital gains tax either when you have made a loss on a sale or when you’re selling your principal place of residence (PPOR). A property is considered a primary residence if:
If you’ve turned your main residence into a rental, you will not have to pay capital gains tax if it was sold within six years of it being rented out.
Make sure to factor in all costs from the sale of the property when computing for capital gains. Keep all relevant receipts as these would be added to your cost base, which will be deducted from your capital gains tax. This can include your borrowing expenses, professional services, stamp duty, transfer fees, and advertising costs too.
If you maintain ownership of the property for 12 months, you’re granted a 50% discount on your capital gains tax.
As always, every situation is different and unique, so make sure you check with your accountant or property lawyer before looking at minimising tax on capital gains.
Whenever the political wind is shifting, it can help to talk to a property expert who will give you a better idea of what could be best for your future.
Some people come to us ready to invest while just having a few questions. Wherever you are in the process, Shore Financial can tell you more about how these taxes work, and what exactly you need to calculate your costs.
Don’t hesitate to get in touch for real advice if you have any more questions about capital gains tax and how this could affect you. Contact Shore Financial today.