How does capital gains tax differ between residential property and commercial property? 

When it comes to investment and savings, the property market has always been considered a safe option. This is particularly evident in the sector’s recent surpassing of $9 trillion as Australian’s continue to invest and benefit from commercial and residential property. Unfortunately, not all investors are educated on the hidden costs and taxes that could eat up their returns.

Capital gains tax (CGT) is one of these hidden elements and how much it can take from your return depends on a variety of factors. Since 1985, you have been required to pay a certain percentage as a levy to the Australian Tax Office (ATO) on the capital gain or profit in the year you sell or dispose of your assets. Assets can be house, land, shares, contractual rights, and collectibles above a specific value. 

There are a lot of factors that determine the amount you pay in capital gains taxes, but of these, the nature of your property is the most crucial factor. The ATO has well-founded reasons for this.

If you are short on time, here is the crux – you pay less or no capital gains tax for selling a residential property that has been or is your primary place of residence for a certain period. If you’re dealing in commercial real estate, you are paying taxes on your profits and the amount varies based on specific parameters. Capital gains tax is not a blanket taxation system, and you can benefit from knowing the details.

Residential Property and Capital Gains Tax:  

Any property zoned, used or intended as a dwelling for an individual, group, or family is considered a residential property. This can be a tract of land or building that is intended to be used as a place of residence by the owner or the tenant. Single, as well as multifamily unit apartments, are considered residential property.

You will be exempt from capital gains tax on the sale of a residential property if:

• You or your family live in it, your belongings are in it, your mailing and electoral roll address is assigned to it and it is connected to utilities such as phones, gas, and power.
• The property is not more than 2 hectares and is used primarily for residential purposes.
• You build a new house or renovate an existing one and live in it for three months within four years of purchasing it.
• You intend to buy a new property that will be your primary residence. To qualify for this exemption, you have to shift to the new home within six months and register it as your primary place of residence.
• You lived in the property continuously for at least three months in the 12 months before the sale.
• The property didn’t generate any rental income in the 12 months and it wasn’t your principal place of residence.
• You require full-time care and cannot live independently.
• You live elsewhere but retained the property as your primary residence.
• You lived there for three months and rented it out for up to six years as part of what is known as the six-year absence rule.
• You live elsewhere, but you have not earned from it.
• You live in it as your primary place of residence for the base period, renovate it and sell it.

You Are Not Exempt From Capital Gains Tax If:  

• Some portions of your home are rented out or used for income generation, like renting out through Airbnb, running your own small business, among others. You will be taxed for the period and the floor space the commercial venture occupies in your residence.
• But if you are living elsewhere and renting the entire property – you will be exempted from capital gains tax for six years because of the main residence exemption rule.

Commercial Property and Capital Gains Tax

Real estate properties that are used or intended to be used for business activities aimed at generating profits are known as commercial properties. Also known as investment or income properties, these include commercial properties and industrial properties.

The concept of capital gains tax on commercial properties is the same – you pay tax on the gains you make after deducting your base cost and maintenance costs. However, there are some key differences in both types of properties, and just like residential properties, there are some discount provisions for commercial property capital gains tax as well.

• Commercial properties are generally not exempt from tax though certain exemptions and discounts are available based on ownership and usage of the property.
• Unlike families, a company is not eligible for the 50 per cent discount on assets held for more than 12 months.
• Farms and home-based businesses are treated differently for tax purposes.
• If you are selling shops, factories, or offices, you might also have to pay GST unless it is sold as part of a GST-free sale.

Discounts and Offsets Available for Commercial Property:   

As said earlier, capital gains tax for commercial property varies from one to another depending on the way they are managed:

• If an individual or a trust owns the commercial property for over 12 months, they are eligible for a 50% capital gains tax exemption.
• If the commercial property is managed by self managed super funds, they are eligible for a 33% discount on the capital gains tax
• However, if a company owns the commercial property, it is not eligible for either of these exemptions.
• Small business owners can get exemptions as part of the ATO’s 5-year exemption, 50% active asset reduction, retirement exemption, and rollover when selling their own premises.  

Like any piece of accounting, calculating capital gains tax on residential property can be an arduous task. We advise you to talk with your accountant to access advice specific to your case and circumstances. With a combined experience of over 100 years, Just Commercial’s team of directors assist commercial and industrial property investors in making smart investment decisions. Get in touch with us to discuss how we can help you yield greater returns from your investment in commercial and industrial properties in Melbourne.