Due to recent global events, the demand for property has dramatically increased which in-turn has increased the price in which people are selling properties for. The increase in property prices means for a lot of investors it is an attractive time to sell.
When looking to sell property however, it important to give consideration to the possible significant looming capital gains tax liability. When a property is sold, it is a capital gains event; this means the seller must pay a ‘capital gains tax’ based on the ‘profit’ they have received from the sale.
This is generally calculated subtracting the cost price (how much the property was purchased for) from the sale price of the property.
An example of this would be Phil; back in the early 2000s Phil purchased his investment property for $100,000, but due to the booming real estate market has now sold his property for $600,000. This would be a capital gain of $500,000 which would have severe tax implications for Phil.
Luckily Phil has owned this property for longer than 12 months, entitling him to the ‘discount method’ which will slice his capital gain in half, meaning he will only pay tax on a capital gain of $250,000. With the 2022 financial year tax rates, if Phil was in the higher earning bracket, he would have to pay 45% on this capital gains event which would mean he would lose $112,500 of this sale to the ATO.
A way that Phil can reduce this would be to take some of the proceeds from the sale and make voluntary concessional superannuation contributions, as these are tax deductible. Phil can also use his ‘Carry-Forward Unused Concessional Contributions’ from previous financial years to contribute significantly more this financial year. For the sake of this example, we will say that Phil has $15,000 in un-used superannuation each year for four years including the current financial year (years ended 2019 – 2022 ), giving him a total of $60,000 unused concessional contribution. By contributing the $60,000 in this instance to his superannuation, Phil will gain a $27,000 tax saving for this financial year. That will reduce the $112,500 capital gains tax that would have originally been paid down to $85,500, while also adding a significant amount to his Superannuation account to assist with retirement.
To be able to access the unused concessional contributions, your superannuation balance must be less than $500,000 and your concessional contribution for the year must not exceed your general contributions cap ($25,000 previous but now $27,500 as of July 1st 2021). While this isn’t beneficial to everyone, it is something to take into consideration when selling property in future.