🔑 Key Takeaways
Capital gains tax is not a separate tax: it is part of your income tax. When you sell an investment property for more than your cost base (roughly what you paid plus associated costs), the profit is added to your assessable income for that financial year. You then pay tax on that gain at your marginal tax rate.
For example, if you bought an investment property in Melbourne for $500,000 and sold it five years later for $700,000, you have made a capital gain of $200,000 (before adjustments for costs). This gain gets added to your other income (your salary, business income, rental income) and you pay tax at whatever rate applies to your total income that year.
The critical point many property investors miss is that CGT is calculated on the gain above your full cost base, not just the difference between purchase and sale price. Understanding what counts toward your cost base can save you thousands, sometimes tens of thousands, in tax.
Your cost base is the total of all costs associated with acquiring, holding, and disposing of the property that cannot be claimed as income tax deductions. The higher your cost base, the lower your capital gain, and the less tax you pay. The five elements of the cost base under ATO rules are:
1. Acquisition costs: The purchase price, stamp duty, legal and conveyancing fees, building and pest inspections, and any buyer’s agent fees. For a $600,000 property in Victoria, stamp duty alone adds roughly $31,000 to your cost base.
2. Incidental costs: Costs you incur in buying or selling, including real estate agent commissions on sale (typically 1.8% to 2.5% of the sale price), advertising costs, auctioneer fees, and legal fees for the sale contract.
3. Ownership costs: For properties acquired after 20 August 1991, certain holding costs like council rates, insurance, and interest can be included in the cost base, but only if the property was not used to produce assessable income during that period. For investment properties generating rent, these costs are claimed as annual tax deductions instead and cannot also be added to the cost base.
4. Capital improvements: Money spent on improvements that increase the property’s value, such as a new kitchen, bathroom renovation, adding a deck, or building a granny flat. Importantly, repairs and maintenance do not count. Only actual improvements do. The distinction matters: replacing a broken window is a repair (deductible against rental income), while installing double-glazed windows throughout is an improvement (added to cost base).
5. Costs of preserving or defending title: Legal costs if you need to defend your ownership of the property, such as boundary disputes or title insurance claims.
📊 Cost Base Example: $600,000 Investment Property Sold for $850,000
| Purchase Price | $600,000 |
| Stamp Duty | $31,070 |
| Legal Fees (Purchase) | $1,800 |
| Building & Pest Inspection | $700 |
| Kitchen Renovation (Improvement) | $25,000 |
| New Deck (Improvement) | $12,000 |
| Agent Commission on Sale (2%) | $17,000 |
| Legal Fees (Sale) | $1,500 |
| Total Cost Base | $689,070 |
| Capital Gain (before discount) | $160,930 |
Without tracking costs properly, the gain would appear to be $250,000, nearly $90,000 more than the actual taxable amount.
If you hold an investment property for at least 12 months before selling, you may be eligible for the 50% CGT discount. This means only half of your capital gain is added to your assessable income. Using the example above, the $160,930 gain would be reduced to $80,465 for tax purposes.
The 50% discount is available to Australian resident individuals and trusts. Companies do not receive the 50% discount. They pay tax on the full capital gain at the company tax rate of 25% (for base rate entities) or 30%. Self-managed super funds (SMSFs) receive a reduced discount of one-third rather than one-half.
This discount is one reason why the ownership structure you choose for investment property matters so much. An individual selling a property held for over 12 months with a $200,000 gain and a marginal tax rate of 37% would pay approximately $37,000 in CGT. The same gain in a company would result in tax of $50,000 to $60,000, with no discount available. Speak with your accountant and finance broker before purchasing to ensure your ownership structure is optimised.
Your main residence (the home you live in) is generally exempt from CGT under the main residence exemption. This is one of the most valuable tax concessions available to Australian property owners. However, the rules around what qualifies as your main residence are more nuanced than many people realise.
You can only have one main residence at a time for CGT purposes. If you own two properties and live in both at different times during the year, you need to choose which one is your main residence. The ATO considers factors like where you keep your belongings, where your family lives, where you receive mail, and your address on the electoral roll.
The six-year absence rule (also called the temporary absence rule) allows you to continue treating a property as your main residence for up to six years after you move out, provided you do not nominate another property as your main residence during that time. This is particularly useful for people who move interstate for work, relocate temporarily, or rent out their home while travelling.
If you move back into the property before the six years expire, the clock resets, and you can move out again for another six years. This effectively allows you to rent out your home indefinitely while maintaining the CGT exemption, as long as you move back in before each six-year period expires and do not claim another property as your main residence.
📋 Client Example: Six-Year Absence Rule in Action
A couple in Geelong purchased their home for $450,000 in 2017. In 2020, they relocated to Melbourne for work and rented out their Geelong home. By 2025, the Geelong property had increased in value to $720,000. Because they sold within the six-year absence window and did not nominate another main residence, the entire $270,000 gain was CGT-free. Had they waited until 2027 (beyond six years), a portion of the gain would have been taxable. Timing the sale correctly saved them over $40,000 in tax.
While you cannot avoid CGT entirely on investment property, there are several legitimate strategies that can reduce the amount you pay. Always consult a qualified tax professional before implementing any tax strategy.
Time your sale to a low-income year. Since capital gains are added to your assessable income, selling in a year when your other income is lower (perhaps due to parental leave, a career break, or retirement) means the gain is taxed at a lower marginal rate. The difference between the 37% bracket and the 19% bracket on a $100,000 discounted gain is $18,000.
Offset gains with capital losses. If you have other investments that have decreased in value, selling them in the same financial year allows you to offset the losses against your capital gains. You cannot create an artificial loss, but if you hold underperforming shares or other assets, coordinating the timing of sales can reduce your net CGT liability.
Maximise your cost base. Keep records of every cost associated with the property, from the initial building inspection report to the final real estate agent invoice. Many investors lose thousands in potential tax savings simply because they cannot prove costs they actually incurred. Digital record-keeping is essential; the ATO recommends keeping records for at least five years after you lodge the tax return that includes the capital gain.
Consider your ownership structure before purchase. Buying in individual names allows access to the 50% CGT discount. Buying through a discretionary trust provides flexibility in distributing gains to beneficiaries in lower tax brackets. The right structure depends on your broader financial situation, asset protection needs, and long-term investment strategy.
Use the main residence exemption strategically. If you are considering selling both your home and an investment property, the order and timing can affect your tax position. The six-year absence rule provides additional flexibility that, with proper planning, can shelter significant gains from tax.
💡 Pro Tip
Be aware of the settlement date, not the contract date. For CGT purposes, the relevant date is when the property changes ownership (settlement), not when you sign the contract. If you exchange contracts in June but settle in July, the gain falls into the next financial year. This distinction can be used strategically when timing a sale around the end of the financial year.
If you buy a property with the intention of renovating and selling for profit, the ATO may treat the profit as ordinary income rather than a capital gain. This means you would not be eligible for the 50% CGT discount, and the full profit would be taxed at your marginal rate. In some cases, GST may also apply to the sale.
The ATO looks at factors including your intention at the time of purchase, the scale and frequency of your property activities, whether you are registered for an ABN in a property-related field, and how quickly you sold after completing renovations. Occasional investors who renovate and sell one or two properties over a lifetime are generally treated under the CGT regime, but those who do it repeatedly as a business activity may be assessed as carrying on a property development business.
If you are planning a knockdown-rebuild, subdivision, or significant renovation with the intention of selling, get professional tax advice before you begin. The difference between CGT treatment and ordinary income treatment on a $300,000 profit can be over $50,000 in additional tax.
If you become a foreign resident for tax purposes while owning Australian property, there are important CGT implications to be aware of. Since 2020, foreign residents are no longer eligible for the 50% CGT discount on Australian property. This means a foreign resident selling an investment property pays CGT on the full capital gain, regardless of how long they held it.
Additionally, the main residence exemption is no longer available to foreign residents unless certain transitional provisions apply. If you are planning to move overseas, it is essential to review your property holdings with a tax advisor before you leave. In some cases, it may be more tax-effective to sell before changing your residency status.
Buyers purchasing property from a foreign resident may also need to withhold 12.5% of the purchase price and remit it to the ATO under the foreign resident capital gains withholding regime. This applies to properties sold for $750,000 or more. Australian resident sellers can apply for a clearance certificate from the ATO to avoid having the withholding applied at settlement.
The single most important thing you can do to minimise your CGT liability is keep thorough records from the day you purchase the property. The ATO requires you to keep records for at least five years after you lodge the tax return that includes the capital gain or loss. For property you hold for decades, that means maintaining records for the entire ownership period plus five years after sale.
Essential records to keep include the purchase contract and settlement statement, all receipts for capital improvements (renovations, extensions, structural work), stamp duty receipts, legal invoices for both purchase and sale, building and pest inspection reports, depreciation schedules, real estate agent contracts and invoices, and any valuation reports obtained during ownership. Store these digitally with cloud backup so they are never lost to fire, flood, or a simple house move.
You do not pay CGT at the time you inherit the property. However, when you eventually sell it, you may be liable for CGT. The cost base depends on when the deceased acquired the property and whether it was their main residence. Properties acquired by the deceased before 20 September 1985 have a cost base equal to the market value at the date of death. Properties acquired after that date inherit the deceased’s original cost base. If the property was the deceased’s main residence and you sell within two years, it is generally CGT-free.
If you subdivide your main residence block and sell the vacant land, the sold portion is generally not covered by the main residence exemption (unless specific conditions are met under the adjacent land rules). You will need to apportion your original cost base between the portion you keep and the portion you sell, typically based on relative land values. The profit on the sold portion is then subject to CGT, potentially with the 50% discount if held for over 12 months.
Negative gearing losses are claimed against your ordinary income each year, not against capital gains when you sell. However, the annual deductions you claim for depreciation reduce the cost base of the property through the capital works deduction clawback, which can increase the capital gain upon sale. Your accountant will calculate this adjustment when preparing your tax return for the year of sale.
Transferring property to a spouse (including as part of a relationship breakdown) can trigger a CGT event. However, there is a CGT rollover relief available for transfers between spouses as part of a relationship breakdown under a court order or binding financial agreement. This means no CGT is payable at the time of transfer, but the receiving spouse inherits the original cost base. Transfers outside of a relationship breakdown are treated as a disposal at market value and may trigger CGT.
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Director & Senior Finance Broker
With years of experience in mortgage broking and finance, Melanie helps clients across Geelong, the Surf Coast, Melbourne and regional Victoria navigate the complexities of home loans and business finance. Contact our team on 03 9020 2699.
