Capital gains tax (CGT) is one of the biggest tax considerations when selling an investment property. Get it wrong, and you could pay tens of thousands more than necessary. Get it right, and you can legally minimise your tax bill through smart planning.

This guide explains how CGT works on Australian investment property, how to calculate it correctly, and strategies to reduce what you owe.

What Is Capital Gains Tax?

Capital gains tax is a tax on the profit you make when you sell an asset for more than you paid for it. In Australia, CGT isn't a separate tax — it's added to your taxable income and taxed at your marginal rate.

Key point: You only pay CGT on the gain, not the total sale price.

Simple example:

Purchase price: $500,000
Sale price: $750,000
Capital gain: $250,000

That $250,000 gain is added to your other income and taxed accordingly.

How CGT Is Calculated on Investment Property

The basic formula seems simple, but the details matter:

Capital Gain = Sale Price − Cost Base

What's Included in the Sale Price?

The sale price (also called "capital proceeds") includes:

The contract price
Any other amounts you receive in connection with the sale

What's Included in the Cost Base?

The cost base is more than just what you paid. It includes:

1. Purchase Price

The original contract price you paid for the property.

2. Acquisition Costs

Stamp duty (transfer duty)
Conveyancing and legal fees
Building and pest inspection reports
Valuation fees (if required for purchase)
Buyer's agent fees

3. Ownership Costs (Limited)

Capital improvements (renovations that add value)
Non-deductible holding costs for properties acquired after 20 August 1991

4. Selling Costs

Real estate agent commission
Marketing and advertising costs
Legal fees for the sale
Styling and staging costs

5. Capital Improvements

Any improvements that increased the property's value:

Renovations (new kitchen, bathroom, extension)
Additions (deck, pergola, pool)
Structural changes

Not included: Repairs and maintenance (these are revenue deductions, not capital).

Cost Base Example

Item	Amount
Purchase price	$500,000
Stamp duty	$17,500
Legal fees (purchase)	$1,500
Building inspection	$500
Kitchen renovation (2019)	$25,000
Bathroom renovation (2021)	$15,000
Agent commission (sale)	$18,000
Legal fees (sale)	$1,200
Total Cost Base	$578,700

If this property sold for $750,000:

Capital gain = $750,000 − $578,700 = $171,300

The 50% CGT Discount Explained

If you hold an investment property for more than 12 months before selling, you're entitled to a 50% discount on the capital gain.

This is the single biggest CGT concession for individual investors.

How It Works

Taxable Capital Gain = Capital Gain × 50%

Using the previous example:

Capital gain: $171,300
50% discount: $171,300 × 50% = $85,650 taxable

Who Gets the Discount?

Entity Type	50% Discount?
Individuals	Yes
Trusts (distributing to individuals)	Yes
Self-managed super funds (SMSF)	33.33% discount only
Companies	No discount

Important: The 12-month period runs from contract date to contract date — not settlement to settlement.

Example: Impact of the Discount

Investor earning $150,000 salary, selling property with $200,000 gain:

Scenario	Taxable Gain	Tax on Gain
Held less than 12 months	$200,000	~$90,000
Held more than 12 months	$100,000	~$45,000

Tax saving from holding 12+ months: $45,000

Depreciation and CGT: The Clawback

If you've claimed depreciation deductions on your property, some of that benefit is "clawed back" when you sell.

Division 43 (Capital Works)

Any Division 43 deductions you've claimed reduce your cost base.

Example:

Original cost base: $500,000
Division 43 claimed over 8 years: $60,000
Adjusted cost base: $440,000

This increases your capital gain by $60,000.

Division 40 (Plant and Equipment)

For plant and equipment, the calculation depends on whether you sell items with the property or they're already fully depreciated.

Important: Even with the clawback, claiming depreciation is usually worthwhile. You've received annual tax benefits at your marginal rate, and the increased capital gain benefits from the 50% discount if held over 12 months.

The 6-Year Absence Rule

One of the most valuable CGT exemptions allows you to treat a former home as your main residence for up to 6 years while renting it out.

How It Works

You live in a property as your main residence
You move out and rent it
You can continue to treat it as your main residence for CGT purposes for up to 6 years
If you move back in, the 6-year clock resets

Key Conditions

You can only have one main residence at a time for CGT purposes
You must have actually lived in the property first
You cannot claim another property as your main residence during this period
You can still claim rental deductions while the exemption applies

Example

Sarah buys a house in 2015 and lives in it until 2020. She then moves interstate for work and rents the property out. In 2025, she sells it.

Ownership period: 10 years
Lived in property: 5 years (2015-2020)
Rented out: 5 years (2020-2025)

Because the rental period is less than 6 years, Sarah can claim the full main residence exemption and pay zero CGT — even though the property was rented for 5 years.

When the 6-Year Rule Doesn't Help

If you rent the property for more than 6 years, you lose the exemption for the period beyond 6 years. You'll need to apportion the gain.

Main Residence Exemption

Your main residence (the home you live in) is generally exempt from CGT when you sell it.

Conditions for Full Exemption

The property was your main residence for the entire ownership period
You didn't use it to produce income (no renting rooms, no home office deductions)
The land is under 2 hectares

Partial Exemption Situations

You may need to apportion if:

You rented part of the property
You claimed home office deductions
You used it as an investment property for part of the ownership period

Calculating Partial Exemption

The ATO uses a formula based on the number of days the property was your main residence versus the total ownership period:

Exempt Portion = Main Residence Days ÷ Total Ownership Days

CGT on Inherited Property

If you inherit a property, special rules apply.

Property Acquired by Deceased Before 20 September 1985

If the deceased bought the property before 20 September 1985 (pre-CGT), your cost base is the market value at the date of death.

Property Acquired by Deceased After 19 September 1985

You inherit the deceased's cost base. Any gain is calculated from their original purchase, not the date you inherited.

Main Residence Exemption for Inherited Properties

You may be entitled to a full or partial main residence exemption if:

The property was the deceased's main residence just before death
The property wasn't used to produce income after death
You sell within 2 years of death (or longer if the ATO grants an extension)

Timing Strategies to Minimise CGT

1. Hold for More Than 12 Months

The 50% discount is the easiest CGT reduction strategy. If you're close to 12 months, waiting can halve your tax.

2. Sell in a Low-Income Year

CGT is taxed at your marginal rate. Selling when your other income is lower means a lower tax rate on the gain.

Consider selling when:

You've taken extended leave
You've retired or reduced work hours
You have a business loss to offset
You've just started a new, lower-paying role

3. Time the Contract Date

CGT is triggered on the contract date, not settlement. If you're selling near the end of financial year:

Contract in June = gain taxed this financial year
Contract in July = gain taxed next financial year

This gives you flexibility to choose which year's income the gain is added to.

4. Maximise Your Cost Base

Keep records of every capital expense:

All renovation receipts
Every improvement
All acquisition and selling costs

The higher your cost base, the lower your gain.

5. Consider a Pre-CGT Asset

Properties acquired before 20 September 1985 are exempt from CGT. If you own one, the gain is entirely tax-free.

CGT and Different Entity Structures

Individuals

50% discount applies after 12 months
Gain added to your personal taxable income
Taxed at marginal rate (up to 45% + Medicare levy)

Trusts

50% discount applies if trust held property for 12+ months
Gain can be distributed to beneficiaries in lower tax brackets
Flexibility in who pays the tax

Companies

No 50% discount — full gain is taxable
Flat 25% or 30% company tax rate
Gain trapped in company until distributed (then taxed again)
Generally not recommended for property investment due to no CGT discount

Self-Managed Super Funds (SMSFs)

33.33% discount (not 50%)
15% tax rate in accumulation phase
0% tax rate in pension phase
Complex rules — get specialist advice

Record Keeping for CGT

Keep records from purchase through to sale — this could be 20+ years.

What to Keep

At Purchase:

Contract of sale
Settlement statement
Stamp duty receipt
Legal invoices
Inspection reports

During Ownership:

All renovation invoices and receipts
Council approvals for works
Depreciation schedules
Photos before and after improvements

At Sale:

Contract of sale
Agent commission invoice
Marketing invoices
Legal invoices

Propperly stores all your property documents securely and calculates your running cost base — so you're prepared when it's time to sell →

CGT Calculation Example: Full Walkthrough

The Scenario

Purchase: March 2016 for $600,000
Sale: September 2025 for $950,000
Ownership: 9.5 years

Cost Base Calculation

Item	Amount
Purchase price	$600,000
Stamp duty	$22,000
Legal fees (purchase)	$1,800
Building inspection	$600
Kitchen renovation (2019)	$30,000
Deck addition (2021)	$18,000
Agent commission (4%)	$38,000
Marketing costs	$4,000
Legal fees (sale)	$1,500
Total Cost Base	$715,900

Adjustments

Division 43 depreciation claimed: $45,000
Adjusted cost base: $715,900 − $45,000 = $670,900

Capital Gain

Sale price: $950,000
Adjusted cost base: $670,900
Capital gain: $279,100

50% Discount (held > 12 months)

Taxable capital gain: $279,100 × 50% = $139,550

Tax Payable

Assuming investor has $150,000 salary:

Total taxable income: $150,000 + $139,550 = $299,550
Tax on gain portion: approximately $62,800

Without proper records and cost base documentation, this investor could have paid tax on a much larger gain.

FAQ: Capital Gains Tax

When do I pay CGT?

CGT is included in your tax return for the financial year the contract was signed. You pay it when your tax assessment is due.

Can I offset a capital loss against the gain?

Yes. Capital losses from other assets (shares, other property) can offset capital gains. Losses can be carried forward indefinitely.

What if I sell at a loss?

You don't pay CGT, and you have a capital loss that can offset future capital gains. You cannot offset capital losses against ordinary income.

Does CGT apply to my home?

Generally no — your main residence is exempt. But partial CGT may apply if you rented it out or claimed home office deductions.

What's the CGT rate?

There's no separate CGT rate. The gain is added to your taxable income and taxed at your marginal rate (16% to 45% depending on your total income).

Can I avoid CGT by gifting the property?

No. A gift is treated as a sale at market value for CGT purposes.

Summary: Key Points

CGT = Sale Price − Cost Base (taxed at your marginal rate)
50% discount if held over 12 months — halves the taxable gain
Cost base includes purchase costs, improvements, and selling costs — keep all records
Depreciation claimed reduces your cost base (but claiming it is usually still worthwhile)
6-year rule lets you rent a former home and keep the main residence exemption
Timing matters — contract date determines which financial year the gain falls into
Entity structure affects the discount available

Estimate your CGT with Propperly's Capital Gains Calculator →

Or track your cost base automatically as you go — so you're ready when you sell →

Last updated: January 2025. This guide is for general information only and does not constitute tax or financial advice. CGT is complex — consult a qualified tax professional before making decisions.

Capital Gains Tax on Investment Property Australia: Complete Guide | Propperly