When you sell an investment property, you will either make a capital gain or a capital loss. This is the difference between what you paid for the property and what you sold it for. This needs to be reported in your income tax return and you will pay a tax on your capital gains. CGT forms part of your income tax and is combined with your income which may increase the tax for which you are liable. If you make a capital loss, you can’t claim it against your regular income, but you can use it to reduce a capital gain.
If you hold your investment property for 12 months or more in your own name, you can apply for a discount of 50% to the CGT you may be liable for. This means you only pay CGT on half of your gross capital gains.
For example, if Jane purchases an investment property for $500,000 and pays stamp duty and additional costs to the sum of $30,000, she will have invested $530,000 in total.
If she sells the property in 5 years’ time for $750,000, she has made a capital gain of $220,000. As Jane has held the property for more than 12 months, she only needs to pay CGT on 50% of this figure ($110,000) which is added to her income on her tax return for that year and taxed in the same way.
Capital gains on investment properties purchased through SMSF are generally taxed at a rate of 15%. If the fund has held the property for 12 months or more, it can apply for a discount of 33%, bringing the effective rate to 10%.
When you convert your super from the accumulation phase to the retirement phase, all earnings become tax-free, meaning you pay 0% CGT when you sell an investment property.
This makes investing in property through SMSF an effective strategy for accumulating wealth and cash flow in your retirement.
Capital Gains Tax is an important consideration in your Property Strategy, whether it is purchased inside or outside of your super fund.