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

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

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  1. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    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
     
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  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Member

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    My best cgt tip is not to trigger a cgt event
     
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  3. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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  4. Peter P

    Peter P Well-Known Member

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

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    If you wish to pay interest in advance the loan would need to be fixed.
     
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  6. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent Business Member

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    with the recent changes to the rules regarding deductible super contributions and the removal of the 10% test making a tax deductible contribution to super rather than salary sacrificing is a new strategy available.
     
    Last edited: 12th Jan, 2017
  7. Perthguy

    Perthguy Well-Known Member

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    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
     
  8. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Member

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    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
  9. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Member

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    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
     
  10. Valentino

    Valentino Well-Known Member

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    Hi Terry is there Part 2 of how to reduce CGT? Thanks!
     
  11. twobobsworth

    twobobsworth Well-Known Member

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    Can you post date a sales contract? I am listing a property at the end of this month as I don't want to exchange this financial year. If someone approaches this financial year are we able to post date the contract to move the CGT liability forward?
     
  12. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    Hi Valentino - I have a half completed draft somewhere. Will try to finish it soon.
     
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  13. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    Contracts are dated when signed.
     
  14. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Member

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    One issue to watch in selling a IP and CGT is this...

    Break any fixed rate loan before selling while it is rented. This helps ensure the breakcost is tax deductible v's rents. Otherwise if the break costs occurs on sale settlement its a CGT cost and worth at least 50% less.
     
  15. Valentino

    Valentino Well-Known Member

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    Before September is ok ;-), we plan to sell then! Appreciate yr tips so far and will use all of them!!
     
  16. Gypsyblood

    Gypsyblood Well-Known Member

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    Sorry for the dumb Question but What happens if there are losses in year 1 on shares and I sell a property with CGT in year 7?
     
  17. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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  18. CGT wonderer

    CGT wonderer New Member

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    Great post, Terry.

    I am most intrigued by tip No. 6. Would you please elaborate.

    Thanks
     
  19. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    If the property was your main residence at death then the beneficiaries cost base would be the value as at your death.
     
  20. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Member

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    May be your costbase......If the deceased estate takes 2 years to vest it could be different.
     
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