Across Australia, residential property prices have had some of the largest growth in values in recent history.

Naturally, this will make property owners feel wealthier and perhaps contemplate selling a property earlier than planned to take advantage of the buoyant market.

However, it’s important to be aware that when you sell real estate, there are tax consequences that need to be factored in so it’s clear how much after-tax proceeds you will receive.

Some of the key tax planning items to be considered when selling property include:

Capital gains tax (CGT) main residence exemption

The CGT main residence exemption allows individuals that sell their main residence to have the sale free from CGT. This is one of the very few tax benefits available in Australian tax law that allows a profit from sale to be completely tax free.

However, the CGT main residence exemption is actually quite complex, and there are many caveats to accessing the exemption, including:

  • The exemption requires that the individuals establish the property as their main residence. This requires evidence of physically moving into the home, having their address updated for things such as electoral roll and driver’s license
  • The exemption requires there to be a “residence” attached to the property. An empty block of land intended to be the main residence or subdividing a proportion of the block without the main residence will not qualify for the CGT main residence exemption
  • If there is a relatively quick acquisition and sale of the property, the ATO make take a sceptical view of whether the intention was to establish the property as main residence or whether the acquisition was made with the intention to sell for profit.

Capital gain vs revenue gain

From a tax perspective, when real estate is sold, the sale will either be treated on “revenue account” or “capital account.”

This distinction is important because a current year capital gain can offset carried forward capital losses. However, a revenue gain is not able to offset any carried forward capital losses.

Also, if real estate is held for over 12 months, individuals, trusts and complying superannuation funds may be eligible for the gain to have access to ether a 50 per cent or 33.33 per cent CGT discount rate. A profit on sale on revenue account has no access to a similar tax discount.

Very broadly, if it can be argued that an asset was held for long term passive investment to primarily derive income from rent, then as a starting point, it is likely arguable the investment was held on capital account (i.e., any profit on sale will be a capital gain). However, if a property was acquired to develop for sale or the intention was to acquire to primarily profit from sale (e.g., the property acquired was vacant land in an area that was acquired with speculation that likely rezoning laws in the area would change to increase the value of the land), then it is likely arguable that the sale and profit would realise a revenue gain for tax purposes.

Tax costs to acquire your next property

In addition to tax costs that may arise when real estate is sold, there are also tax costs to factor in if you are intending to purchase another real estate asset.

The main tax cost is landholder duty or stamp duty. Each state and territory will administer their own set of rules and rates on how much duty applies when real estate is acquired.

Land tax

If you intend to hold a property that has increased in value, it’s also important to be aware of the increased holding costs that apply for tax purposes. When the value of land increases, this will also mean the land tax cost for the property will increase.

There are certain exemptions that may apply, such as for primary production land or land used to increase housing supply or build-to-rent accommodation. Therefore, these should be considered and applied where potential exemptions may exit.

Therefore, being aware of the tax treatment of profits made in selling property should be an important part of the decision-making process for property owners. And in many cases, obtaining professional tax advice could mean the difference between making a profit at all or having sufficient money to invest in the next investment.

This article was first published in the Autumn 2022 issue of Financial Times.