The basics of property investment: Understanding capital gain

By the resi financial blog team, 16 September 2013

Capital gains for property investors

Property investment has always been a lucrative way for people to supplement their incomes and can be accessed by anyone who takes the time to research the market and invest in smart locations.

There are a number of different terms and concepts to understand before you make any property investment decision. One important concept to grasp is capital gain and its importance for investment success.

Capital gain is when an asset increases in market value, giving it a higher worth than the original purchase price.

In terms of property, this is the type of income you can earn when a property you own increases in value over a period of time. As the value of your real estate increases, so too does the difference between the price you paid and its current value.

Investors will tell you that a good annual value increase for property is somewhere between 7 and 10 per cent. These aren't short term gains, which emphasises the importance of scouting ahead and finding the next real estate hotspot.

As you start to make repayments, the difference between your house's value and the amount left to repay on your home loan can become available for personal use through home loan refinancing.

This is known as home equity and can be used for a number of things, including further property investment. This wealth can help you to further grow your property portfolio and continue to accumulate wealth over time. 

When you sell your home, you may be subject to pay a capital gains tax. This applies if the house has increased in value during the time you owned the property.

Capital gains tax forms as a part of your income tax for the year, but there are a number of concessions available. For example, if you have owned your property for more than 12 months, the amount of tax you have to pay is discounted by 50 per cent, helping you to save money in the long run.

Categories: Property Investment