How can we reduce our capital gains tax?

Eric is selling an investment property and wants to know how to reduce his capital gains tax.

Q. Eric
We bit the bullet and sold our investment property this year, to capitalise on the booming property market and set us up for retirement in a few years. Now we are faced with the prospect of capital gains tax (CGT). Is there anything we can do to reduce our liability this year?

A. This isn’t our area of expertise, but Andrew Zbik from Creation Wealth says there are a number of things you can consider when selling an investment property and dealing with the tax implications.

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You may be eligible for a 50 per cent discount on your CGT if you have held the asset for more than 12 months, which I will assume is the case.

There are two methods for claiming this discount: you can either have 50 per cent of the assessable capital gain included in your taxable income or apply the indexation method. If you decide to apply the indexation method, you will need to consult a tax professional for help as it is decidedly more complex.

Here are the other tips from Mr Zbik to reduce your CGT payments.

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Make additional concessional contributions to super
You can opt to make a personal deductible superannuation contribution to your superannuation fund.

These are only taxed at 15 per cent (or 30 per cent if your taxable income is over $250,000).

It is important to keep in mind that you cannot exceed the concessional contributions cap of $25,000 for the 2020/2021 financial year (this cap increases to $27,500 after the 1 July 2021).

Your concessional contributions cap also includes any contributions made by your employer or a salary sacrifice arrangement.

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Prepay interest expenses for next year
If you have any expenses that you can prepay, this will help to offset the capital gains tax liability in the year the liability has been incurred.

For example, if you have some capital gains resulting from the sale of shares, and you own an investment property, prepaying next year’s interest on your loan prior to 30 June means you can offset the capital gain in this financial year.

The downside of this strategy is that in the next financial year you will not be able to claim the expense as you cannot claim it twice. This strategy may be appropriate if the sale of an asset with a large capital gain in the current financial year has pushed you into a higher marginal tax rate bracket.

You should always consult with a financial expert when it comes to your tax affairs in this situation.

Do you have an investment property? Are you confused about the rules surrounding capital gains tax? Why not share your thoughts in the comments section below?

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Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a Centrelink Financial Information Services officer, financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

Written by Ben