Money

How you can avoid paying Capital Gains Tax on your investment property

This one simple trick could save you thousands.

By Amber Manto
Whether you've hung onto your former bachelorette pad or are considering letting out your current home to rent somewhere more desirable or go overseas, Capital Gains Tax (CGT) is the one thing that can cast a dark cloud over your hopes and dreams.
Upon selling your investment property, the government will want their slice of the profit at the end of the tax year you sell, and it's a bill that can run into the thousands.
There are a number of ways to (legally) avoid paying CGT, but one which is pretty simple to get your head around is the six-year rule. And if this scenario suits your situation, you could end with a tidy windfall by putting it into practice.
Simply put, the ATO allows you to claim your investment property as your main residence for a total of six years, even if you do not officially live there. Because this is classed as your Primary Place Of Residence (PPOR), you will not have to pay CGT on it.
"So this 'grace period' is ideal if you're going overseas for a period or working away somewhere in Australia and living in rented accommodation," Mark Chapman, H&R Block's director of tax communications tells Money Magazine.
Also, if you move back into this property after the six years and then rent it out again, the six-year clock will reset and you'll be exempt from paying even less tax, Chapman adds.
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Simple, right? Well, like anything, there's one major thing to consider.
Listing an investment property as your PPOR can have its drawbacks if you own and live in another property, as you will be liable to pay CGT on that one for the period it was deemed an "investment".
As such, pick the property that is likely to generate the highest capital gain (in other words, sell for the most profit) as your main residence.
You do not need to make this choice until the tax year you decide to sell. Do your sums, choose wisely.
It should also be noted that if you end up keeping the investment property for more than six years, you will be liable to pay CGT on the period not covered by the exemption.
Capital Gains Tax is complicated so before making any decisions, consult your trusted accountant or financial planner.