Understanding Capital Gains Tax (CGT) on Australian Property

Overview

Capital gains tax (CGT) is one of the most significant tax considerations for Australian property owners. Whether you are selling an investment property, a holiday house, or vacant land, understanding how CGT works can save you thousands of dollars. This guide explains when CGT applies, how it is calculated, and the exemptions and discounts available.

What Is Capital Gains Tax?

Capital gains tax is not a separate tax — it is part of your income tax. When you sell an asset (including property) for more than you paid for it, the profit is called a capital gain. That gain is added to your taxable income in the financial year you sell, and you pay tax on it at your marginal tax rate.

If you sell a property for less than you paid, you make a capital loss. Capital losses can be used to offset capital gains in the same or future financial years, but they cannot be used to reduce other types of income.

When Does CGT Apply to Property?

CGT applies when you sell or dispose of a property that is not your main residence. This includes:

• Investment properties — residential or commercial
• Holiday homes and weekenders
• Vacant land
• Properties acquired through inheritance (in some cases)

CGT also applies if you change the use of a property — for example, moving out of your home and renting it out.

The Main Residence Exemption

Your main residence (the home you live in) is generally exempt from CGT. To qualify for the full exemption, the property must have been your main residence for the entire period you owned it, and you must not have used it to produce income (such as renting out a room).

If you lived in the property for part of the ownership period and rented it out for the rest, you may receive a partial exemption based on the proportion of time it was your main residence.

There is also a six-year absence rule: if you move out of your main residence and rent it out, you can continue to treat it as your main residence for CGT purposes for up to six years, provided you do not treat another property as your main residence during that time.

The Pre-1985 Exemption

Properties acquired before 20 September 1985 are exempt from CGT entirely. CGT was introduced on that date, so assets held before then are not subject to the tax regardless of the gain made. However, any capital improvements made after 20 September 1985 may be subject to CGT considerations.

The 50% CGT Discount

Australian resident individuals who hold a property for more than 12 months before selling are entitled to a 50% discount on the capital gain. This means only half of the net capital gain is added to your taxable income.

For example, if you make a net capital gain of $200,000 on an investment property held for three years, you only include $100,000 in your taxable income.

The 50% discount is available to individuals and trusts (in most cases), but not to companies. Self-managed super funds (SMSFs) receive a reduced discount of one-third.

How to Calculate Your Capital Gain

The basic CGT calculation is:

1. Capital proceeds — the sale price of the property
2. Minus the cost base — the original purchase price plus certain costs
3. Equals the capital gain (before any discount)

The cost base includes:

• The purchase price
• Stamp duty paid on purchase
• Legal and conveyancing fees (on both purchase and sale)
• Real estate agent commissions on sale
• Capital improvement costs (renovations that add value, not repairs)

It does not include holding costs such as interest, council rates, or insurance — unless the property was acquired after 1 July 2017 and was never used to produce income.

Use our Capital Gains Tax Calculator to estimate your CGT liability based on your specific numbers.

Strategies to Minimise CGT

While you must always comply with ATO rules, there are legitimate strategies to reduce your CGT liability:

• Hold for more than 12 months to access the 50% discount
• Maximise your cost base by keeping records of all capital improvements and acquisition costs
• Time your sale to a financial year when your other income is lower
• Offset gains with losses — if you have capital losses from other assets, these reduce your net gain
• Use the six-year absence rule if applicable to your main residence

Record Keeping

The ATO requires you to keep records of all property transactions, including purchase contracts, settlement statements, receipts for capital improvements, and details of any income earned from the property. These records must be kept for at least five years after you sell the property.

Estimate your CGT: Capital Gains Tax Calculator | Check your tax position: Income Tax Calculator.

Sources: ATO — Capital Gains Tax, ATO — Your Home and CGT, ASIC Moneysmart.