Capital Gains Tax on Investment Property — A Guide

What Is Capital Gains Tax?

Capital gains tax (CGT) is the tax you pay on the profit when you sell an investment property for more than you paid for it. It is not a separate tax — the capital gain is added to your assessable income and taxed at your marginal rate. Understanding CGT is essential for anyone considering property investment.

The 50% CGT Discount

If you hold an investment property for more than 12 months, you are generally eligible for a 50% discount on the capital gain for Australian resident individual taxpayers. This means only half of the profit is added to your assessable income. Recent budget changes have proposed adjustments to this discount, so check the current rules with your adviser.

Main Residence Exemption

Your main home (the one you live in) is generally exempt from CGT. However, if you rent it out at any point, or if it is on a large block of land, the exemption may be partially affected. The six-year absence rule allows you to treat your former home as your main residence for up to six years while you rent it out — but the rules are complex and depend on your circumstances.

What Your SOA Should Disclose

If your adviser has recommended an investment property strategy, your SOA should clearly explain the expected CGT implications, how the property fits into your overall tax position, and whether the CGT discount was factored into the projections. The SOA should also discuss negative gearing implications and how selling the property would affect your retirement plan.

How CGT Works on Investment Properties

Capital gains tax is not a separate tax — it is part of your income tax assessment. When you sell an investment property, the capital gain is added to your assessable income and taxed at your marginal rate. The gain is calculated as: sale price minus cost base (purchase price plus certain costs).

If you hold the property for more than 12 months, you are eligible for a 50% CGT discount for individuals (33.3% for super funds). This means only half the gain is included in your assessable income, significantly reducing the tax payable.

Reducing Your CGT Liability

You can reduce your CGT liability by maximising your cost base. The cost base includes: the purchase price, stamp duty and legal fees on purchase, capital improvements (not repairs), holding costs (interest, rates, insurance), and selling costs (agent commission, legal fees, marketing).

Capital losses from other investments can be used to offset capital gains. If your total capital losses exceed your gains in a year, the net loss can be carried forward to offset future gains. Timing the sale of investments to coincide with capital losses can reduce your overall CGT.

CGT and the Main Residence Exemption

Your main residence (the home you live in) is generally exempt from CGT. However, if you use part of your home for business, rent it out, or it is on more than 2 hectares of land, part of the gain may be taxable. If you move out of your home and rent it, you may still qualify for the main residence exemption for up to 6 years if you do not claim another property as your main residence.

The 6-year absence rule allows you to treat your former home as your main residence for CGT purposes while you rent it out. This can provide significant tax advantages if you plan to return to the property. However, strict conditions apply, and you can only treat one property as your main residence at a time.

Frequently Asked Questions

When do I pay CGT?
CGT is paid when you lodge your tax return for the year the property was sold. You do not pay CGT at settlement. The gain is included in your income tax assessment for that financial year.

What is the 50% CGT discount?
If you hold an investment property for more than 12 months, only 50% of the capital gain is included in your assessable income. This effectively halves the tax rate on the gain. The discount applies to individuals, not companies.

Can I avoid CGT by reinvesting in another property?
No. Australia does not have a like-kind exchange (1031) rule for investment properties. CGT is payable on sale regardless of whether you reinvest the proceeds. However, if you sell your business premises as a small business owner, you may qualify for CGT concessions.

How does CGT apply if I inherit a property?
When you inherit a property, you generally acquire it at the deceased's cost base (for properties acquired after 20 September 1985). CGT applies when you sell it, based on the deceased's original cost base. The 50% discount may apply if you sell more than 12 months after the deceased acquired it.