Should you time the sale of a property to minimise CGT?

Timing the sale of an investment property to minimise capital gains tax (CGT) is something all investors should aim to do.

A long-term reader, Angela from Melbourne, asks about the rules for selling an investment property and the costs involved.

For many investors one of the main costs when they sell their investment is CGT.

Tax should never be the only consideration for buying or selling an investment. If the market is running hot and you can make a windfall gain by selling you may pay more tax but you will also have extra in your pocket. Similarly, do not sell into a weak market only to pay less tax.

CGT is levied as part of an individual's income tax and applies only to properties bought after September 19, 1985. Say you bought and sold a property within the 2009-10 tax year, for a profit of $50,000. In the same year your income from working was $75,000.

The taxman adds the two together - $125,000 - and your tax bill, not including the Medicare levy, is $34,950 So how can you better that situation?

• Rule 1 - Never sell assets at a profit within 12 months of buying them unless the reason is compelling, because if you held the above property for at least this time you would score a 50% reduction in the amount of the capital gain subject to tax - reducing your overall tax bill to $25,450.
• Rule 2 - Check to see if you have any loss-making assets you can sell because you can offset the loss against the gain. Returning to our example, if in the same year you had sold some long-held shares not expected to recover from the GFC, at a $25,000 loss, your net capital gain would have fallen to $25,000, your taxable gain to $12,500 and your total tax bill to $20,700.
• Rule 3 - Check to see if you have any accumulated capital losses to offset against the gain because this would also lower your taxable gain. Losses cannot be offset against your regular non-investment income but can be accumulated until you have capital gain profits to offset against. 
• Rule 4 - Also consider waiting to sell a profitable asset until you are earning less from other income - perhaps at retirement. 
• Rule 5 - Make sure you take advantage of all the elements that go into making up the "cost base" to reduce your tax bill. The cost base includes the acquisition cost plus other costs associated with acquiring, holding and disposing of the asset. For example, you may have paid $500,000 for a property but also outlaid a total of $100,000 in buying and selling costs and capital works to improve its value.

The cost base of your property is $600,000 and, if you sell it for $800,000, you will pay tax on a $200,000 profit. Without the adjustments your profit would have been $300,000 and your tax bill considerably higher. For more see ato.gov.au.

You will need complete documentation for these outlays - so keep good records (and none of them can have been previously claimed as tax deductions).

Should you sell an investment property that's tenanted? If you have great tenants who will help you display the property to its best potential, than selling with tenants can be fine. But many tenants are none too happy about living in a property that is on the market, and their lack of co-operation can hinder a sale.

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