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Tax Considerations When Selling Your Own Property

Michael Robertson

Selling property in Australia – whether it’s your family home, an investment, or a holiday house—comes with tax implications that are important to understand. For homeowners handling their own property sale without a real estate …

Tax Considerations When Selling Your Own Property

Selling property in Australia – whether it’s your family home, an investment, or a holiday house—comes with tax implications that are important to understand. For homeowners handling their own property sale without a real estate agent, it’s particularly essential to get a solid grasp on the tax side of things. This guide covers the main tax considerations, particularly focusing on Capital Gains Tax (CGT), exemptions, record keeping, and how different property types can affect your tax outcome.

1. Understanding Capital Gains Tax (CGT)

Capital Gains Tax is the main tax you need to think about when selling real estate in Australia. It’s not a separate tax but part of your income tax, calculated on the profit you make from selling the property. The gain is added to your assessable income for the financial year and taxed at your marginal tax rate.

1.1 What is a Capital Gain?

A capital gain arises when you sell a property for more than you paid for it (including the purchase price plus any associated costs such as stamp duty, legal fees, and improvements). Conversely, if you sell for less than your cost base, you incur a capital loss, which can be used to offset other capital gains.

1.2 When is CGT Payable?

CGT is triggered at the time of settlement, not the contract date. You include the net capital gain in your tax return for the financial year in which the sale is settled.

2. The Main Residence Exemption

The main residence exemption is one of the most significant CGT concessions. If the property was your primary home for the entire period you owned it, you might not have to pay any CGT.

2.1 Eligibility for Full Exemption

  • You must have lived in the property as your main residence the entire time you owned it.
  • You must not have used it to produce income (e.g., rent it out).
  • The land size must be 2 hectares or less.

2.2 Partial Exemption

If you rented out the property for part of the ownership period or used it for business, you might be eligible for a partial exemption. The ATO uses a formula to apportion the capital gain between exempt and taxable portions.

2.3 The 6-Year Rule

If you move out of your main residence and rent it out, you can still claim it as your main residence for CGT purposes for up to six years—provided you don’t nominate another property as your main residence during that time.

3. Investment Properties and CGT

When you sell an investment property, CGT almost always applies. You cannot claim the full main residence exemption, but you may qualify for other CGT concessions.

3.1 50% CGT Discount

If you’ve owned the property for more than 12 months, you’re eligible for a 50% discount on the capital gain, provided you’re an individual, trust, or complying super fund (super funds get a 33.3% discount).

3.2 Cost Base Adjustments

Your cost base includes the original purchase price, stamp duty, legal fees, title transfer costs, and any capital improvements (e.g., renovations). Keeping good records is essential to reduce your CGT liability.

4. Record Keeping Requirements

Maintaining accurate records can make a big difference in how much tax you pay. The ATO recommends keeping the following documents:

  • Purchase contract and settlement statement
  • Receipts for improvements and renovations
  • Rates and land tax assessments
  • Loan documents
  • Details of any income earned (e.g., rent)
  • Details of periods of personal vs income-producing use

5. Selling Property Owned by a Trust, Company, or SMSF

Different rules apply if your property is held by a trust, company, or self-managed superannuation fund (SMSF).

5.1 Trusts

Trusts may qualify for the 50% CGT discount, depending on their structure and how long the property was held. Capital gains are usually distributed to beneficiaries, who then pay tax at their individual rates.

5.2 Companies

Companies are not eligible for the 50% CGT discount. They pay tax at the company rate (generally 25-30%). This can result in a higher overall tax burden compared to holding property as an individual.

5.3 SMSFs

Self-managed super funds benefit from lower tax rates (15%) on capital gains and may be eligible for a one-third CGT discount if the property was held for over 12 months. If the fund is in pension phase, gains may be completely tax-free.

6. GST Considerations

GST is generally not applicable to residential property sales, but there are exceptions—particularly for new residential premises or substantial renovations.

6.1 When GST Applies

If you’re in the business of property development or building and selling new homes, you may be liable for GST on the sale. This adds complexity and requires registration for GST with the ATO.

6.2 Margin Scheme

If GST is applicable, the margin scheme may reduce the GST payable. It’s only available in specific circumstances and can significantly affect your tax outcome. Always seek professional advice if GST is involved.

7. Foreign Residents Selling Property in Australia

Foreign residents selling Australian property face additional tax obligations, including withholding tax and limitations on CGT exemptions.

7.1 CGT Withholding

When a foreign resident sells property worth $750,000 or more, the buyer must withhold 12.5% of the purchase price and remit it to the ATO. This can be offset against the final tax liability.

7.2 Loss of Main Residence Exemption

From July 2020, foreign residents are no longer entitled to the main residence exemption, even if they previously lived in the property. This can result in significant CGT liabilities.

8. Tips for Minimising Your Tax Liability

  • Plan ahead: Consider the timing of your sale to minimise your income for that year.
  • Use the CGT discount: Hold property for more than 12 months where possible.
  • Maintain detailed records: This is crucial for claiming deductions and calculating your cost base accurately.
  • Consider ownership structure: The way you hold the property affects your tax liability.
  • Seek professional advice: Tax rules can be complex and change frequently. An accountant or tax advisor can help you navigate them.

Selling your property privately can save you on agent commissions, but you must ensure that all your tax obligations are met. Understanding Capital Gains Tax, knowing when exemptions apply, and keeping thorough records can help you reduce your tax bill and avoid penalties. The ATO provides extensive resources, but it’s always wise to consult a professional, especially for complex cases involving trusts, SMSFs, or foreign residency.

Whether you’re selling your family home or an investment property, staying informed about tax implications will help you make better financial decisions and keep more of your hard-earned profit in your pocket.