How to Save on Capital Gains Tax When Selling Property

If you're like me, considering selling that sun-drenched villa abroad or parting with your seaside holiday home, you may be shocked at what follows, and that's tax. Specifically, Capital Gains Tax.

Being an Australian resident, the Australian Taxation Office (ATO) requires you to report and, if necessary, pay CGT on gains made from the sale of overseas property.

But this is where it gets interesting, there are ways to legally cut or eliminate CGT, and I've taken time to delve into them.

Let me take you through what I've discovered on how to not pay capital gains tax on property, particularly if it's overseas.

Do I Really Have to Pay CGT on a Foreign Property?

Yes, if I am an Australian resident for tax purposes, then the ATO regards profits from selling foreign property. Whether in Bali, Paris, or New York, the instant I sell and make a profit, CGT kicks in in Australia.

But, this is significant if I taxed the money in the country where I live, I may be entitled to something known as a foreign income tax offset. That will assist me in paying less tax in Australia.

However, I do need to include the gain or loss on my Australian tax return in the financial year in which the property has been sold.

Am I an Australian Resident for Tax Purposes?

I used to think being a citizen or holding a visa determined my tax obligations. That's not entirely true. According to the ATO, I may be a resident for tax purposes if:

• My permanent home is in Australia
• I spend over 183 days in Australia in a year
• I maintain strong family and financial ties here
• Or I work for the Australian government overseas while contributing to a local super scheme

If any of these apply to me, then yes I am forced to think about CGT, even on foreign property.

Keeping track of all this can get tricky quickly. To make life easier, I use The Property Accountant to record property transactions, expenses, and sale details across multiple countries. It helps me stay organised and makes the reporting part much less stressful at tax time.

How I Work Out CGT on a Foreign Investment Property

This is where I needed to be focused. To work out CGT, everything needs to be worked out in Australian dollars (AUD). That includes the purchase price, improvements, and sale proceeds, each must be based on the day's exchange rate when each of those transactions was made.

Here's how I do it:

• Cost Base: I work out what I paid for the property, adding any deductible costs such as lawyers' fees and improvements, to AUD by using the applicable historical exchange rates.
• Capital Proceeds: I next calculate how much money I made from the sale of the property and work this out in terms of AUD by applying the selling exchange rate.
• The Difference: Selling price less cost base = capital gain or loss.

If it's a gain, that amount is added to my taxable income and taxed at my marginal rate. If it's a loss, it can be used to offset gains elsewhere either this year or in the future.

3 Strategies I Use to Avoid CGT on Foreign Property

I discovered there are several effective strategies that can reduce or even avoid CGT altogether. Here's how I do it:

1. Avail Yourself of Double Taxation Agreements (DTAs)

Australia has Double Taxation Agreements with a large number of countries. What that means is if I am taxed on the profit in the country where the property is held, I may not have to pay the whole of CGT in Australia.

But I always ensure that I have evidence such as tax returns and payment receipts to substantiate that I've already been taxed. Every DTA is different, so I refer to the actual agreement between Australia and the country where my property is located.

2. Claim All Deductible Expenses

This one was a game-changer for me. I discovered that I could deduct some costs from my capital gain:

• Legal fees
• Stamp duty
• Real estate agent commissions
• Advertising costs
• Major refurbishments or upgrades (such as the installation of a second bathroom or solar panels)

What doesn't qualify? Ordinary repairs and maintenance such as repainting or plumbing repairs. However, I maintain comprehensive receipts and records for anything else to support my claims.

3. Claim the 50% CGT Discount

This one saved me a fortune. If I've had the property for over 12 months and I'm a resident of Australia for tax purposes, I can claim a 50% discount on the capital gain. So only half of it goes into my taxable income.

That's huge.

But if I owned the property through a company, I would not receive the discount. Likewise, if I was a non-resident or temporary resident when I bought it after May 8, 2012.

Can I Avoid CGT by Moving Overseas?

I even considered moving overseas as a way of avoiding CGT. But it's not quite that easy. To be a non-resident for tax purposes, I'd have to sever most of my connections with Australia. That involves:

• Selling my Australian residence
• Relocating my family permanently
• Creating a permanent residence elsewhere

Only then could I escape Australian CGT. A few nations, such as Singapore, New Zealand, and Monaco, do not charge CGT whatsoever. But if I remain an Australian tax resident, CGT comes with me, even if I'm relaxing on a beach in Portugal.

The Penalty of Getting It Wrong

CGT is complex, and I found out the hard way that making a mistake could cost me thousands. Reporting incorrectly, missing deductions, or avoiding tax liabilities in another country can set off fines, interest, and ATO audits.

This is why I finally called on tax experts. They explained what my obligations were, reported accurately, and kept the money I might otherwise have lost to unnecessary tax.

My Summary Tips on How to Avoid Capital Gains Tax on Property

Let me quickly summarize all I've learned:

• If I am an Australian tax resident, CGT is on both domestic and foreign properties.
• I need to exchange everything to AUD using the exchange rate of the time for each transaction.
• DTAs may avoid double taxation, but you need documentation.
• Claiming deductible expenses can cut the gain, and the tax I have to pay.
• If I own the property for longer than 12 months, I should be eligible for the 50% CGT discount.

FAQs About How to Avoid Capital Gains Tax on Property

Final Thoughts

Learning how to avoid capital gains tax on property, especially foreign property helped me protect my hard-earned investment profits. It took time for me to research, and expert advice(a lot of it), but in the end it's worth it.

If you're in the same situation as I was before, don't just sit there. Take time to plan sensibly. And if it does begin to feel too much, don't hesitate to seek professional advice.

Capital Gains Tax may be tricky, but with the right attitude, it needn't cost you the earth.