No one likes paying taxes on the money they earn, so one of the great things about property is that there are a lot of tax advantages, especially when you’re working with the best buyers agents who can guide you through the process.
One thing a lot of people don’t realise is that capital gains tax is generally lower than income tax. It’s a common misconception, but if you can realise capital gains on something instead of income, you’re going to end up paying less tax. A professional buyers agent can help you navigate these nuances, ensuring that your investments are structured in the most tax-efficient way.
This can make a huge difference in your finances, especially when it comes to property or investments. For those working with buyers advocacy, understanding these tax advantages becomes even more accessible and can save significant amounts in the long run.
If you’ve held an asset for more than 12 months, only 50% of the capital gain is added to your taxable income. In other words, the tax office only looks at half of the profit when calculating what you owe. At worst, you’ll be taxed at a rate of 23.5% on the entire capital gain, assuming your marginal tax rate is the highest one at 47%. That’s because 47% is applied to half of the gain.
To put it in perspective, 23.5% is a pretty good tax rate. Let’s say you make a million dollars in profit. If you’re holding that asset in your personal name and you’ve held it for over 12 months, you’d be looking at paying $235,000 in tax. That’s significantly cheaper than company tax, which is set at 25%, and it’s definitely more favourable than the tax rate on regular income or revenue, which can go as high as 47% depending on your tax bracket.
But here’s where it gets interesting. What tax rate you ultimately pay depends on what you’re doing with the asset and your intention behind holding it. This is something a lot of people don’t take into account.
If you’re buying a property to develop and then sell for a profit, you wouldn’t want to do that in your own name. Because you won’t get that 50% capital gains discount. In that case, you’re considered to be running a business or an enterprise, and the tax you’d owe would be based on your personal marginal tax rate, which could be up to 47%. Consulting the best buyers agents can prevent this common mistake by suggesting the right structure for your investment.
This is where strategy comes into play. When you’re making decisions about property or other investments, you’ve got to consider the tax implications upfront.
What’s your long-term plan? Are you looking to flip the property for a quick profit? Or are you in it for the long haul, planning to hold onto the asset for more than a year?
For instance, if your plan is to develop and sell property, it might make sense to do that through a company or a trust instead of holding it in your personal name. You’d avoid paying your personal marginal tax rate, which could be up to 47%, and instead pay company tax, which, as I mentioned earlier, is 25%. Alternatively, if you’re holding the asset as a long-term investment, it could be more beneficial to hold it in your own name and take advantage of the capital gains discount after 12 months.
Unfortunately, many people don’t spend enough time thinking through these details. They get caught up in the excitement of a new investment, but they miss the chance to optimise their tax strategy.
In the end, it’s all about matching your business strategy with the right structure. Too often, people make decisions without considering how the tax implications will affect their bottom line, and that can lead to some expensive mistakes down the track.
