27/06/2024
What is Capital Gains Tax?
You must pay capital gains tax or CGT when you profit from selling your property compared to its purchase price.
One of the first things property investment novices often need to understand is how CGT impacts your tax return.
CGT is not a separate tax but rather an add-on forming part of your annual assessable income tax for the year the home is sold.
Additionally, the amount of CGT paid varies depending on your overall taxable income; if you earn $40,000 per year and make a capital gain of $60,000, you will pay income tax for $100,000.
Who pays CGT?
However, many property owners are exempt from CGT altogether.
If the property you are selling was considered your family home and place of residence, then the profits from the sale will be exempt from CGT.
This is called a principal residence exemption and means you won’t have to pay capital gain on any renovations you make.
To be eligible for the exemption, the Australian tax office requires you to have lived on the property for at least three consecutive months before the sale.
However, if you have chosen not to live in the property and reside elsewhere, the home that is not your primary residence is considered an investment and, thus, subject to CGT.
Are renovations on properties tax-deductible?
In most instances, the cost of renovating the property can be deducted before CGT tax is paid.
So if you purchased an investment property for $500,000 and then spent $50,000 on renovations, then sell it for $650,000, you’d only pay CGT on $100,000 – not the total $150,000 profit.
However, if you wait 12 months before selling the property, an additional 50 per cent CGT discount is applied.
Furthermore, if part of the renovation work you have undertaken on the property can be classed as repairs, they are fully exempt from CGT. This can include anything from replacing broken windows to changing a faulty tap.
However, repairs can only restore broken features to their original functionality; therefore, a broken washing machine would need to be replaced with a similar appliance. Replacing it with a combo washer/ dryer with smart home functionality would mean the repair falls into the taxable renovation category.
However, there are some grey areas, with the repainting of a property often able to be classified as a repair rather than a renovation.