When Do You Need to Pay Capital Gains Tax?
Capital Gains Tax (CGT) applies to the profit gained by an individual when an asset is sold or otherwise released. When you sell an asset such as a property or shares in a company, you will pay CGT in most cases.
Your “capital gain”, according to the ATO, is the amount between what it cost you to acquire the asset and what you ultimately sell it for. If you buy a house for $600,000 and sell it for $700,000, you will be taxed on the $100,000 profit you made on that asset.
However, when it comes to property, there are scenarios in which CGT either doesn’t apply or only partially applies:
The property is your main place of residence
Capital Gains Tax doesn’t apply as much (or at all) to homeowners whose primary place of residence is the asset being sold. If you’re an investor selling a property for the sole purpose of making a profit, you will likely pay CGT – but if you’re looking to sell so you can move to another state or country, the CGT will not apply to you as harshly. That’s because you’re selling your primary place of residence.
The temporary absence rule applies when a homeowner rents out their home while away, effectively still treating the property as their main residence. Your main place of residence can be rented out because you’re moving away for work, taking a long holiday or studying. It still counts as your primary residence.
You can only ever have one main residence. However, if you’re selling your old home to buy a new one, you are allowed a six-month overlap where the ATO will allow you to have two. To find out what qualifies as a “main residence”, you can follow this link to the official ATO description.
You use your main residence as a business
If you’re using your home as a place to generate income (you own a home office or you’re a freelancer of some description), you may be exempt from CGT.
The ATO has differing definitions of what constitutes a home business, such as the difference between “a place of business” and “a place of convenience”. If you’re planning on claiming CGT exemption through this avenue, it’s best to speak with your accountant to get a clear understanding as to whether or not your place of residence will be classed as a place of business by the ATO.
At Mortgage House, we’re no strangers to the homeowner’s journey. It’s a long (but rewarding) one.
But don’t worry, we can help with that.
If you’re thinking of selling your home, you can contact us for advice about Capital Gains Tax. The tax paid on your profits can drastically affect your financial planning, so it pays to speak to the experts about it.