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How Do I Minimise Capital Gains Tax?

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Q. In August 2004 I bought an investment house with the plan to live in it when I retire. (I’m 55 yrs old in August 2008).

I own my existing home and the investment house has been rented since the day I bought it. My plans have since changed and I wish to sell the investment house to fund other activities in my retirement.

I was planning to sell my present home around Christmas 2008, then live in the investment house until I sell it around July/August 2009.

Is there some strategy I could put in place to minimise Capital Gains Tax when I sell the investment house?

Josie’s answer: As you would be aware, your family home which is called your main residence in the ATO’s Capital Gains Tax Guide, is exempt from capital gains tax (CGT)

However, it is only possible to nominate one dwelling as your main residence. In your case, the dwelling that you describe as ‘your present home’ will be exempt from CGT when you sell. Unfortunately, a portion of your investment property will be subject to CGT.

You mentioned you purchased the property in 2004 and plan to sell in 2009. Therefore you will have owned it for 5 years. Your accountant will work out the number of days it was an investment property, and the number of days it was considered to be your main residence.

For example, if it was rented out for four years, and you lived in it for one year, then four-fifths of the gain will be subject to CGT. Just to make it a bit more confusing, as you have owned it for more than 12 months, 50% will be exempt.

Let’s just say you work out that four-fifths of the gain is $50,000, then $25,000 will be exempt. CGT is a very complex area and should you be suffering from insomnia, feel free to read the ATO’s 162 page guide to Capital Gains Tax by following this link :- Guide to capital gains tax 2006-07A couple of ways you can minimise Capital Gains Tax include planning the sale of the property if you expect your taxable income to decrease.

For example it might be worthwhile signing the contract in a new financial year. A terrific strategy, particularly if you are self employed or pass the 10% rule is by making contributions to a superannuation fund.

Contributions to superannuation are fully tax deductible up to $100K (as you are over 50 years of age). The 10% rule refers to taxpayers whose salary and wages income is less than 10% of their total income. For example, your total income from investments and salary might be $100K, but your income from an employer might only be $5K which is less than 10%.

Remember, that the super fund deducts 15% tax when they receive it. Whether either of these strategies will help to minimise CGT all depends on your taxable income and your personal rate of tax. Regardless, it is always a nice problem to have (wish I was paying millions in tax!).

Ray, I highly recommend you seek advice from an accountant. Trust the above helps and wishing you all the best for the future.

Don’t forget that the above information is general in nature and not specific to your goals and objectives. It is recommended that you seek personal financial advice specific to your needs.

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Does the fact that I would be living in the house when I sell it make a difference?

Thank you for any direction you may give me.

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