Capital Gains Tax in Real Estate Investing

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If you’ve heard of Capital Gains Tax (CGT) but are not entirely sure what it is, I’ll give a quick explanation.

Capital Gains Tax is imposed by governments on individuals who sell an asset (such as a property, shares or business) for a higher price than what they purchased it for.

Osbornes are property solicitors who are experts in all types of property law.

 

The difference between the selling and buying price (capital gain) is the amount that gets taxed.  You do not get charged CGT on cash in the bank, because it does not gain in value.

The interest paid on cash in the bank is classed as income and therefore may be taxed via income tax.

As you can see below, several countries impose a capital gains tax. Therefore, whether you are an American investing in an ETF, or a Canadian investing in real estate, prepare yourself to mention any capital gains when tax time comes around.

In most cases, there is usually free tax software available that can help when it comes to capital gains.

However, keep in mind that the tax implications will vary from country to country. For example, the implications in Canada will vary compared to Germany, and so on and so forth.

Countries That Have a Capital Gains Tax

  • Australia
  • Canada
  • Finland
  • Germany
  • Sweden
  • United Kingdom
  • United Stats of America

Countries That Don’t Have a Capital Gains Tax

  • Netherlands
  • New Zealand
  • Switzerland

You can find out more of the specifics of capital gains tax in each country in this wikipedia entry.

 

How Does CGT Affect Property Investing?

If you buy a property for $400,000 and sell it some years later for $600,000, you have made a $200,000 capital gain.

Under Australian tax law, if the property is an investment property (and not your principle place of residence), then you must pay tax on the $200,000.

The way this will be calculated is by taking 50% of the gain ($100,000) and adding it to your normal taxable income for this financial year.

You will then pay regular income tax on your taxable income for the year.  You can use this income tax calculator to help work out how much tax you owe on your income.

The reason you only have to pay tax on 50% of the capital gain is because if you have held the property as an investment for longer than a year, you receive a CGT discount.

However, if you have “flipped” (see what is flipping?) your property within a year, you must pay capital gains tax on the full gain.

Exemptions

Depending on the country, there may be various exemptions or discounts that are applicable to CGT.  I have already mentioned the 50% discount for Australian investment property if you’ve held it for longer than 12 months.

In Australia, your primary home where you live is exempt from capital gains tax.

It can often be challenging to keep up with laws around taxation and finance, but it is a good idea to have some understanding of issues such as capital gains tax.

It could be the difference between picking a good property investment or a bad one.


 

5 Responses to Capital Gains Tax in Real Estate Investing

  1. A capital gains tax (CGT) is a tax on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. Not all countries implement a capital gains tax and most have different rates of taxation for individuals and corporations.

  2. Nice post but as per my opinion investing in property can bring many rewards. Where gearing is involved the losses can help reduce income tax.

  3. Capital gains tax means a tax on property sell cost. For example if you a purchased a property for $ 100000 and resold it for $ 150000, then you have to pay capital gains tax for $ 50000, which your profit.

  4. Real Estate investment is the mostly preferred and safe investment among all. It gives profit in most of the cases.You made here some useful points regarding Capital Gain tax.

  5. Thank you for providing such a valuable information. Investors or potential investors must understand its importance and how does it affect their investment.

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