Renting out your property can be a great way to earn some extra income, but there are tax implications that it's important to be aware of before you put your home on the market. The most significant of these is the capital gains tax, or CGT, that you must pay upon the eventual sale of your investment property. However, by taking a closer look at how the CGT is calculated, you may find an exemption that you qualify for. There are certain exemptions allowed by the Australian Taxation Office, including those who rent out their primary residence.

How CGT Is Determined

To calculate the capital gains tax, it's first necessary to determine whether or not you have made a capital gain. This is the difference between the sale amount of a property and its original cost base. One thing that's important to remember is that cost base not only includes the price you paid for your property, but also any associated fees including legal costs or stamp duty. It's also possible to sell your asset at a capital loss, if this number is lower than the original base amount. Tax is determined by adding your capital gain or loss to the amount of taxable income you have received from your property. This profit will then be taxed at the marginal tax rate. If the property has been owned for longer than one year, then only 50% of the capital gain is added to taxable income.

Full Exemptions

There are numerous exceptions to the capital gains tax which are important to understand. For example, your main place of residence is exempt from CGT. To qualify for this exemption, the property must have served as your primary dwelling from the time of purchase. For example, if you bought a property to rent out but then ended up living in it several years later, it wouldn't qualify. However, if you originally purchased the property to use as your residence but then moved out later and rented it out, it may still qualify for the exemption. Provided that you rented it out for less than six years, it would qualify for an exemption. Yet be aware that if you are claiming an exemption for this primary home, you cannot then claim it on a secondary home even if it is the one you are currently living in. The second property would still be subject to capital gains tax.

Partial Exemptions

Partial exemptions can also apply, particularly if you have acquired multiple investment properties over a period of time. In the case above where you rented out what was originally a primary residence for more than six years, the ATO would only tax you for the time period after the six years has passed. You would also receive a 50% discount on the CGT if you owned the property for longer than one year, making it a partial exemption or discount.

If you've spotted a prime investment opportunity in Tasmania up on Homesales or are thinking about renting out your primary residence while you go away for an extended holiday, you'll need to think about ways to reduce your capital gains tax. By planning in advance, you can maximise your investments and avoid being hit with a surprise tax bill in the future.