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Tax Tip 119: How to Reduce CGT on Investment Property (Part I)

Discussion in 'Accounting & Tax' started by Terry_w, 11th May, 2016.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    18th Jun, 2015
    Southern Highlands NSW
    How to Reduce Capital Gains Tax on Investment Property (Part I)

    Below are some ways in which CGT may be reduced on the sale of an investment property. But before you decide to sell you should properly work out what the potential size of the capital gain will be. Once you know what you are dealing with you will then be able to work out appropriate strategies to reduce the amount of tax payable.

    1. Timing of the sale
    Usually it is the date of the contract entered into that is the relevant disposal date for CGT purposes. Some things you can do:
    a) Bring forward the sale so that it falls into a year of low income, or
    b) Push back the sale so that if falls in a later year where you expect to have lower than usual income. Delaying the sale can also allow for more time to plan and implement other strategies.
    c) Time the crystallising of losses (see below)
    d) Make sure you have held the property for the full 12 months for the 50% CGT discount

    2. Offset Capital Gains with Capital Losses
    Capital Losses can be used to offset capital gains. Losses can result from:
    a) Carried forward losses from prior years, or
    b) Current year losses arising from the sale of other assets.
    Bring forward the sale of other property or shares that have dropped in value may help. But you have to get the timing right. Selling the shares with the capital loss in a later tax year to the sale of the property with the capital gain will result in no offsetting and the capital loss being carried forward to be offset against some future potential capital gains.
    Take care with the sale of shares and then immediately buying them back as the ATO may want to deny the deduction as they can deem this to be a wash sale with the sole purpose of a tax benefit.

    3. Claim everything possible
    When working out the capital gains tax the cost base of the property needs to be worked out. Various expenses incurred during ownership can be used to reduce the amount of CGT payable. So it is essential not to miss any potential deduction as this will result in more tax being payable.
    See my tax Tip on this: Tax Tip 76: Calculating the Cost Base for CGT purposes.

    4. Small Business Concessions
    Often overlooked are the small business concessions which may be used to reduce the CGT (sometimes to nil) where the property has been used as part of a business.

    There are 4 main small business CGT concessions, namely:
    a) the small business 15-year exemption
    b) the small business 50% active asset reduction
    c) the small business retirement exemption and
    d) the small business rollover
    @MikeLivingTheDream first gave me the idea of using the 4 small business concessions.

    5. Reducing your Taxable Income
    Any capital gain is added to your other taxable income for the year so look at ways to reduce your income. There are 2 aspects to working out taxable income:
    a) Earnings, and
    b) Deductions
    Either reducing earnings or increasing deductions will result in less tax, Combine the 2 and your savings will be greater still.
    5a. Reduce Earnings
    Not many would want to reduce their earnings, but here are some suggestions for those that do:
    • Taking that leave without pay that you always wanted may work in well with reducing your earnings;
    • Salary sacrificing into super can also reduce your taxable income;
    • Change from full time to part time;
    • Quitting to travel the world.
    • Where self-employed you may be able to delay income.
    • Salary sacrifice into super
    Before prepaying interest, you should consider the flow on effects for later years – where you will have little to no interest claimable which may result in more tax payable. Also, be aware that you cannot just pay into the loan, but must actually fix the loan for 1 year and
    5b. Increase Deductions
    Having greater deductions will mean you have less taxable income. Some ways to increase deductions, other than the usual claiming everything you can, are:
    • Prepay interest on other investment properties
    • Donations
    • Deductible contribution into super where possible.

    6. Die in your investment property
    As you approach death move into your investment property with the biggest gain and rent out the main residence.
    Usually, it is difficult to get the timing right on this one!

    Stay tuned for Part II
    PacMan, Perthguy, Peter P and 7 others like this.
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    18th Jun, 2015
    Southern Highlands NSW
  3. Peter P

    Peter P Well-Known Member

    17th Apr, 2016
    Hi Terry,
    Great post. Would variable rate loans for the IP(s) need to be changed to fixed rates to calculate future repayments?
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    18th Jun, 2015
    Southern Highlands NSW
    If you wish to pay interest in advance the loan would need to be fixed.
    Peter P likes this.
  5. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent Business Member

    24th Jun, 2015
  6. Perthguy

    Perthguy Well-Known Member

    23rd Jun, 2015
    That's good if you can avoid it but not everyone can. Because I had no money when I started investing, I bought a half share of a property. Worse still, it was a negatively geared development site we ended up deciding not to develop. It made a lot more sense to sell it when the market was nearing its peak than to continue to hold.

    I reduced my taxable income for that year by salary sacrificing into super. This strategy make a significant difference to the tax payable and was a nice boost to my super balance at the same time
  7. Tip : For fixed rate loans on the CGT asset being sold ensure that the loan is broken while property is tenanted and prior to settlement otherwise the breakcost will be a CGT reduction item not a revenue deduction. This would mean a 50% lesser tax benefit in most cases

    Tip 2 : Avoid receipt of discretionary income (ie company divs, trusts)

    Tip 3 : Avoid Fully franked income as this grosses-up so each $1 of actual dividend adds $1.43 (est) to taxable income

    Tip 4 : Take up break costs on IP loans that are being retained. This max deductions in the present tax year too.
    Last edited: 12th Jan, 2017
  8. From 1 July 2017.

    The only catch is that all taxpayers will have a lower concessional contribution limit as there wont be a higher limit for those 49+ anymore. This changed strategy also come with the catch that the "new" benefit is only really one for employees (as others can already contribute) and they need to carefully ensure that the employer contribution of 9.5% is allowed for so the $25K annual cap isnt breached. My tip would be to defer making a contribution until June 2018 when a very reliable estimate of their tax position, actual employer contributions and final actual CGT amounts can be determined. A few issues:

    • Concessional super contributions cannot create a tax loss
    • Preservation
    • Need to ensure that the taxpayer taxable income does not go into the 0% tax band (up to $21K est) as this can erode the benefit too.
    • Each owner may be eligible