What is capital gains tax?
- Yuan Gao
- Feb 29, 2024
- 2 min read
If you make money from your property increasing in value, you’ll have to pay tax.
An investment property’s value can rise over time — if this happens, it gives you what is called a ‘capital gain’. The way the gain is taxed may be complex but it’s worth understanding how this tax could affect you as an investor.
Capital gains on investment properties
When you’re selling an investment property, capital gains tax (CGT) may be applied to any profit you make from the sale. CGT can be assessed and calculated in different ways, but there are a few ways to minimise how much CGT you may be required to pay.
Reducing the amount of capital gains tax you pay
When you’re buying your investment property, the tax office adds costs like stamp duty and legal fees to calculate the total purchase price. Then, when you are handing the property over to someone else, selling costs like legal fees and agent’s commission may be deducted from the sale price.
It's important to keep track of every purchase cost and selling expense so that your CGT can be calculated accurately. Keeping a tight grip on receipts and staying on top of exactly how much you’ve invested in the property could help you trim your capital gain.
The amount of CGT you pay is tied to your personal income, so you’ll pay CGT at whatever tax rate you pay within your income bracket.
CGT is a complicated tax, so it’s a good idea to speak to a tax professional. They can help you understand which exemptions may be available to you.
Calculating returns on your investment property
Understanding how to calculate returns lets you compare how your investment performs with other investments you could have put your money towards. A rental property could earn rental yield (income) plus capital growth (how much the property’s value rises). These numbers added together make up the property’s total return.
You can divide the annual rent by the property’s value and multiply the result by 100 to work out the yield. For example, if your property is worth $500,000 and you receive annual rent of $26,000, the gross yield will be 3.12% (that’s $26,000 divided by $500,000 x 100).
Capital growth is the percentage increase in your property’s value over time. So a property has achieved capital growth of 5% if it’s worth $600,000 at the start of the year and its value rises to $630,000 by the end of the year.
If you decide investing in property is right for you, your FND Broker can help unlock a strategy that works for you.
