The tax rates are going up from 0% to 5% of the value of the home (1%) and to 5% of the rental value of a property for owner occupiers and investors (2%). If you own a second home, the rate for you will also be 5% of the second home’s market value.
The increases are being made to make the tax more stable, with the government confident that they will not increase in the future.
From January 1, 2014, the following rates will apply to home purchases (the rates for owner-occupiers and investors will apply from January 1, 2015):
On capital gains made from the sale of a primary residence up to $500,000 (after $1 million, capital gains tax is treated as a personal income tax liability and is charged at a rate of 15%): no tax;
On capital gains made above $500,000 (including on your own home):
if you are an owner-occupier, 2.5% (a flat rate of 0.5% applies if your home is less than $500,000); or
if you are an investor, 2.5% (or 0.5% for investors who are resident in a capital city, and for investor in a capital city who have their home overseas, as determined by the Australian Taxation Office).
The rate for capital gains made on the sale of a second home (whether or not you are a resident in a capital city): no tax.
Taxation of rental properties
From January 1, 2014, rental properties will be taxed at a rate of 0.4% for all residential property (above $3,000 per annum), and 2% for all non-residential property.
If you own a property that is used for tourism or education, the rate will apply from the first day the property is listed for rent (on or after 1 January 2014).
No capital gains tax for capital improvements to properties
On the other hand, if you have improved a capital property, you may not be subject to capital gains tax.
This applies to improvements done on existing properties as well as new builds. If you make improvements to your property such as a new kitchen, the capital gains tax rate will not apply if the value of the improvements is added to the current market value of the property.
However, if you do not use the improvements, you may be subject to capital gains tax.
When will I owe tax?
The tax office has given a few examples of how taxes are calculated. These might be useful to check for more information on your own situation:
Example 1:
We purchased a $200,000 property and sold it at a loss for $150,000. We have no capital gain, but a capital loss of $50,000. So, we owe no tax.
Example 2:
We purchased a $200,000 property and sold it for $150,000. We have a capital gain of $50,000.
We have to multiply the gain by 30% to find out the tax due. So, we owe $7500.
Example 3:
We purchased a $200,000 property for $300,000. We sell the property for $300,000, so, we have no capital gain and no capital loss.
We have to multiply the $300,000 sale price by 25% to find out the tax due. So, we owe $3750.
We can save a few dollars by not paying too much capital gains tax. There are some tax-saving measures you can use to offset capital gains tax, for example:
If you purchase a property worth more than $2.5 million and sell it at a loss of $100,000 (less than $2.5 million) you can deduct $100,000 from the cost of the property. This will reduce your capital gains tax, as follows:
You owe $100,000 in capital gains tax;
You pay $75,000;
You save $25,000 in capital gains tax.
If you own more than one property (like my mum does) you can use a “stacked” arrangement. The $50,000 she receives from selling her second property in our example would be added to the $75,000 that she owes in capital gains tax on the first property. She would save $25,000 this way.
As you can see from these examples, if you buy and sell properties it can be easy to rack up big capital gains tax bills. That’s why the government is trying to put in place a system that will make it easier for you to pay less tax. The system will be phased in over three years from 1 July 2013 and won’t apply to small investors.
If you want to try to solve your tax debts/ liens issues, I suggest you to call (888)489-4889 for a free consultation.