Gifting a property to a family member or a loved one can be a generous financial gesture. However, it’s crucial to understand the tax implications, even without a traditional sale. By gaining a comprehensive understanding of Capital Gains Tax (CGT) when considering gifting an Australian property, you can potentially maximise your financial benefits.
What is Capital Gains Tax?
Capital Gains Tax is a tax levied on the profit made when selling an asset, including real estate, shares, and other investments. The gain is calculated as the difference between the asset’s sale price and the original purchase price (the cost base).
Gifted Property and CGT
Think gifting a property means avoiding CGT? Think again. The Australian Taxation Office (ATO) considers a gift to be a disposal of the asset, triggering a CGT event even through no money changes hands. The property is assessed using its market value at the time of the gift to calculate CGT liability.
Also read: Gift Tax QLD
How is CGT Calculated on Gifted Property?
CGT on gifted property in Australia is calculated based on the property’s market value at the time of the gift, not the initial purchase price. The individual gifting the property is considered to have sold it at its market value on the date of the gift.
Here’s a simplified example of how CGT might be calculated on a gifted property:
- Original Purchase Price: $500,000
- Market Value at Time of Gift: $800,000
- Capital Gain: $300,000
The person gifting the property would be liable for CGT on this $300,000 capital gain. The property’s recipient inherits the original cost base of $500,000.
Exemptions and Concessions
There are several exemptions and concessions available that might impact the CGT on a gifted property:
- Main Residence Exemption: If the gifted property was the giver’s main residence for the entire ownership period, the gift may be exempt from CGT.
- Partial Exemptions: Partial exemptions may apply if the property was a main residence for only part of the ownership period.
- The Six-Year Rule: If a property was rented out but at some point was the owner’s main residence, it may be exempt from CGT if the rental period was less than six years.
- 50% CGT Discount: If the asset was held for more than 12 months, the giver is eligible for a 50% discount on the CGT amount.
Reporting CGT on Gifted Property
The person gifting the property must report the capital gain or loss in their tax return for the year the gift was made. It is calculated by subtracting the property’s cost base (cost of acquisition plus any costs incurred to improve or sell the property) from its market value at the time of the gift.
Impact on the Recipient
The recipient should be aware that the property’s market value at the time of the gift becomes their cost base for future CGT calculations if they decide to sell the property.
Planning Ahead
Strategic planning can help manage or reduce the impact of CGT on gifted property. Professional advice from a tax consultant or financial advisor is recommended to explore all available options, such as timing the gift, considering potential exemptions, or revising the property’s use to maximise tax benefits.
The implications of capital gains tax on gifted property in Australia can significantly influence financial decisions. The donor and the recipient must be aware of their tax obligations and opportunities for exemptions. With careful planning and professional advice, the impact of CGT can be effectively managed, ensuring that the gift of property fulfills its intended purpose without unexpected financial burdens.
Are you considering gifting property, or have you recently received property as a gift?
Capital gains tax implications can be complex. At CJC Law, we specialise in property tax matters and can provide tailored advice to ensure you make informed decisions and optimise your tax position. Contact us today to discuss your specific situation and secure your peace of mind with expert guidance.
