How does capital gains tax work when I sell an investment property?

Okay, I can provide a general overview of how capital gains tax (CGT) works when you sell an investment property, based on the provided legislative context.

In Plain English

When you sell an investment property, you might make a capital gain (profit) or a capital loss. CGT is the tax you pay on a capital gain. Here's a simplified breakdown:

1. CGT Event: Selling a property is a CGT event Income Tax Assessment Act 1997.
2. CGT Asset: Investment properties (like land and buildings) are considered CGT assets Income Tax Assessment Act 1997.
3. Calculate the Gain or Loss: You calculate the capital gain by subtracting the property's cost base (original purchase price plus certain other costs) from the capital proceeds (the sale price) Income Tax Assessment Act 1997. If the costs are higher than the sale price, you've made a capital loss.
4. Discounts and Exemptions:
   • Main Residence Exemption: Generally, you're exempt from CGT when you sell your main home, but this can change if you rent it out Income Tax Assessment Act 1997. However, this exemption may not apply if you are a foreign resident Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Act 2019.
   • CGT Discount: If you owned the property for more than 12 months, you might be eligible for a CGT discount (50% for individuals) Income Tax Assessment Act 1997. The discount percentage may be adjusted if you were a foreign resident or temporary resident during the ownership period Tax Laws Amendment (2013 Measures No. 2) Act 2013.
5. Net Capital Gain: You add up all your capital gains for the year and subtract any capital losses. You can't deduct a capital loss from your regular income, but it can reduce your capital gain in the current or future years Income Tax Assessment Act 1997.
6. PAYG Withholding: If you are a foreign resident, the purchaser may be required to withhold a portion of the purchase price and remit it to the Commissioner Taxation Administration Act 1953.

Detailed Explanation

1. CGT Event and Assets:

   • Most CGT events involve a CGT asset Income Tax Assessment Act 1997. CGT assets include land, buildings, shares, units in a unit trust, contractual rights, and even foreign currency Income Tax Assessment Act 1997.
   • The time of a CGT event is often when the contract is made, not when it's completed Income Tax Assessment Act 1997.

2. Calculating Capital Gain or Loss:

   • You make a capital gain if the capital proceeds (what you receive from the sale) exceed your total costs associated with the event Income Tax Assessment Act 1997.
   • You make a capital loss if your total costs exceed the capital proceeds Income Tax Assessment Act 1997.
   • Capital proceeds are the capital amounts you receive or are entitled to receive from the CGT event Income Tax Assessment Act 1997.

3. Exemptions and Roll-overs:

   • There are several categories of exemptions that might reduce your capital gain or loss, or allow you to disregard it Income Tax Assessment Act 1997. These include exempt assets (like cars) and exempt transactions (like compensation for personal injury) Income Tax Assessment Act 1997.
   • Roll-overs allow you to defer or disregard a capital gain or loss from a CGT event in specific situations Income Tax Assessment Act 1997.

4. Foreign Residents and CGT:

   • Foreign residents are subject to CGT on taxable Australian property Taxation Administration Act 1953.
   • The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Act 2019 made changes to the main residence exemption for foreign residents. The exemption may not be available if you are a foreign resident.
   • A purchaser acquiring taxable Australian property from a foreign resident may be required to withhold a portion of the purchase price and remit it to the Commissioner Taxation Administration Act 1953. The amount to be withheld is generally 10% of the first element of the CGT asset's cost base Taxation Administration Act 1953. In some circumstances, the withholding rate can be varied Taxation Administration Act 1953.

5. Record Keeping:

   • Adequate record-keeping is essential for dealing with any CGT liability Income Tax Assessment Act 1997.

Disclaimer: This is a general explanation based on the provided context. CGT can be complex, and your specific circumstances may affect your tax liability. It's always best to consult with a qualified tax advisor for personalized advice.