April 12, 2019 Only Estate Agents

What is Capital Gains Tax?

Laws around capital gains tax can confusing to many investors. In this article, we’ll delve into this area of tax law. By the end we should have a greater understanding about what capital gains tax is and how it is calculated.

 

Let’s start by finding out what capital gains tax is. This is a tax needs to be paid whenever you sell an asset, which includes things like shares and property. If it was purchased for personal use and you spent over $10,000, you need to pay capital gains tax when you sell that asset. The tax applies in the year that you decide to sell the property, with any capital gains you make being added to your taxable income. Things like your car and your main house might be exempt from capital gains tax. Now that we know a little more about how what capital gains tax is, let’s examine the next big question. How do you calculate capital gains tax?

 

Calculating capital gains tax can become a very complex process, which you may want to discuss with qualified tax accountants. However, we can provide a basic understanding of how to find the amount of capital gains tax you owe. This tax can be calculated by deducting the profit you made by selling the asset from the amount you purchased the asset for. If you’ve owned the property for a year before you decide to sell it, you may be able to get a 50% reduction in your capital gains. However, things get more complex if you purchase the property before the 21st of September 1999, as you need to add indexation to the amount of capital gains tax you pay. This is designed to account for the effects of inflation. It should be noted that any expenses such as legal fees or maintenance is added to the costs of property. However, this poses another question, what happens if you have a net loss when you sell the property?

 

Having a net loss on capital gains usually occurs because the cost of fees like maintenance are higher than the profit you make from selling the property, a common technique used by investors to avoid paying the tax. To make sure that you can prove that you paid for all the maintenance activities you should keep receipts for your records. This loss can also be transferred into future years. For example, if you made a loss when you sold a property last year you can use that to offset any profit you make from selling a property this year. Additionally, there is no time limit with losses. For example, if you sell a property in five years you can use the loss you made in 2017 to offset that profit.

 

While many aspects of capital gains tax are confusing, investors need to be aware of how these laws work to make sure that they pay the right amount of tax. Hopefully, this article has helped clarify capital gains tax law.