Canberra homeowners looking to upsize may find that selling their current property at a loss could actually save them thousands of dollars in taxes, according to property experts.
How selling at a loss can benefit upsizers
When a homeowner sells a property for less than they paid, they incur a capital loss. While this loss cannot be used to reduce other income, it can be offset against future capital gains. For upsizers, this means the loss from selling their current home can reduce the capital gains tax (CGT) owed when they eventually sell their new, larger home.
Property analyst and buyer's agent, Michelle May, explained that this strategy is particularly advantageous in the current Canberra market, where some homeowners are selling at a loss due to market conditions. “If you’re upsizing, selling at a loss now could actually be a smart financial move because you can carry that loss forward and offset it against the capital gain on your next property,” she said.
Case study: The Canberra couple who saved $50,000
One Canberra couple, who wished to remain anonymous, sold their townhouse in 2023 for $600,000, having purchased it for $650,000 in 2019. They incurred a capital loss of $50,000. They then purchased a larger family home for $1.2 million. When they sell that home in the future, they will be able to deduct the $50,000 loss from any capital gain, potentially saving thousands in CGT.
“This is a legitimate tax strategy that many people overlook,” said tax accountant David Green. “The key is to ensure that the property is held as an investment or as your main residence, as different rules apply.”
Main residence exemption and CGT
For most homeowners, the main residence exemption means no CGT is payable when selling their primary home. However, if the property was used for income-producing purposes, such as renting out a room, part of the gain may be taxable. In such cases, a capital loss can be offset against that taxable portion.
“The main residence exemption is not always 100%,” May noted. “If you’ve claimed deductions for home office or rental income, you might have a partial CGT liability.”
Market context in Canberra
Canberra’s property market has seen fluctuations, with some areas experiencing price declines. According to CoreLogic data, the median house price in Canberra fell by 2.3% in the year to November 2023. This has led to some homeowners selling at a loss, particularly those who purchased at the peak of the market.
“For upsizers, this could be an opportunity to move up the property ladder while potentially reducing future tax bills,” said real estate agent John Smith. “It’s not ideal to sell at a loss, but if you’re planning to stay in the new home for several years, the tax benefits can outweigh the initial loss.”
Considerations and risks
Experts caution that this strategy is not suitable for everyone. Homeowners should consult a tax professional to understand their specific circumstances. Additionally, carrying a capital loss forward requires careful record-keeping.
“You need to declare the loss in your tax return for the year you sell, and then it can be carried forward indefinitely until you have a capital gain to offset it,” Green explained. “But if you never sell the next property, or if it also sells at a loss, the benefit may not materialize.”
In summary, while selling at a loss is generally not desirable, for Canberra upsizers, it can be a strategic move to reduce future tax liabilities, particularly in a market where prices have softened.
