Nick Bruining Q+A: How to dodge the taxman when you sell an investment property

Question

In the late 1990s we bought an investment property in Carine for $180,000.

We have spent about $50,000 on capital improvements, including a new bathroom, floors and a solar power system.

For the past three years, our son, his wife and our grandchildren have lived there. We would now like to sell it to them for a very reasonable price but we need to do it in a way that minimises costs.

Do you have any suggestions?

Answer

Whether you decide to gift the home outright or sell it at a discount, the transaction will be classified as a “related party transaction”.

The Australian Tax Office, the WA Department of Finance (for stamp duty, which is payable) and Centrelink will require that a market valuation be prepared by a licensed valuer at the time of disposal. You will be assessed by all agencies on the current market value.

The disposal of the property will be subject to capital gains tax. Assuming that no depreciation has been claimed, the tax calculation is reasonably straight forward.

The original purchase price of $180,000 plus the capital expenditure of $50,000 becomes a cost-base of $230,000. If we assume a valuation of $930,000 applies, then your gross profit is $700,000.

Because you held the asset for more than 12 months, only 50 per cent of the gain becomes assessable income for tax purposes. In your case, this is $350,000. If owned jointly, this is divided by two again to give each of you $175,000. This figure will be added to your other assessable income for the year and that total is taxed at your personal marginal tax rate.

If you are under 67, you may be able to make personal concessional contributions to superannuation to reduce this tax. The maximum amount that can be claimed is $27,500 a year, which includes any other concessional contributions, such as compulsory employer contributions and salary-sacrificed amounts.

If your total superannuation account balances are less than $500,000 and you made no concessional contributions for the last financial year, you can carry-forward last year’s $27,500 and add it to this year’s. Indeed, you can carry over up to five years’ worth of unused cap amounts.

Concessional contributions are subject to a 15 per cent contributions tax and could be doubled if each of your adjusted taxable incomes for the year exceed $250,000.

If on Centrelink benefits, your gift could have long-term benefits if you are asset tested.

Anything gifted to your children over $10,000 will be held on your Centrelink records for five years and included in means-test calculations.

However, five years to the day, the gift will drop off the system and you will then be assessed as though the gift and the asset never existed.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association