What is Capital Gains Tax on Property?
Definition
Capital Gains Tax (CGT) on Property
Capital gains tax is the tax you pay on the profit (capital gain) when you sell an investment property or other CGT asset in Australia. The gain is added to your assessable income in the financial year you sell and taxed at your marginal tax rate. If you held the property for more than 12 months, you may be eligible for a 50% CGT discount.
CGT is not a separate tax, it forms part of your income tax. When you sell an investment property for more than you paid (after accounting for the cost base), the net capital gain is added to your other income and taxed at your marginal rate. Understanding how CGT is calculated can save you thousands of dollars through legitimate concessions and timing strategies. For worked examples and advanced strategies, see our in-depth CGT guide for property investors.
How to Calculate CGT on Property
- 1
Determine the cost base
Add up the original purchase price, stamp duty, legal fees, building and pest inspection costs, and any capital improvement costs (renovations that add value, not repairs). This total is your cost base.
- 2
Determine the capital proceeds
This is the sale price minus selling costs such as agent commissions, advertising fees, and legal fees on the sale.
- 3
Calculate the capital gain
Subtract the cost base from the capital proceeds. If the result is positive, you have a capital gain. If negative, you have a capital loss that can be carried forward to offset future capital gains.
- 4
Apply the 50% CGT discount (if eligible)
If you held the property for more than 12 months and you are an individual (not a company), you can halve the capital gain. For example, a $200,000 gain becomes $100,000 after the discount.
- 5
Add to your taxable income
The discounted capital gain is added to your other assessable income for the financial year. You pay tax on it at your marginal tax rate.
Example Calculation
- Purchase price: $600,000
- Stamp duty and legal fees: $25,000
- Renovation costs: $40,000
- Cost base: $665,000
- Sale price: $900,000
- Selling costs (agent, legal): $20,000
- Capital proceeds: $880,000
- Capital gain: $880,000 − $665,000 = $215,000
- After 50% discount (held >12 months): $107,500 added to taxable income
Main Residence Exemption
Your primary home (main residence) is generally fully exempt from CGT. You do not pay any capital gains tax when you sell the home you live in, provided it has been your main residence for the entire period of ownership, the land is under two hectares, and you have not used it to produce income (such as renting out a room).
The 6-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. This is known as the 6-year absence rule. During this period, you must not treat another property as your main residence. If you move back in before six years, the clock resets. If you exceed six years, CGT applies on a proportional basis for the period beyond the six-year window.
Frequently Asked Questions
You do not pay CGT at the time you inherit property. However, when you eventually sell the inherited property, CGT may apply. The cost base depends on when the deceased acquired the property, if they purchased it before 20 September 1985, your cost base is the market value at the date of death. If purchased after that date, you inherit the deceased's original cost base.
No. Capital losses can only be offset against capital gains, not against salary or other income. If your capital losses exceed your capital gains in a given year, the unused losses carry forward indefinitely and can be applied against future capital gains.
No. Properties acquired before 20 September 1985 are CGT-exempt. However, any capital improvements made after that date may be subject to CGT on the portion of the gain attributable to those improvements.
Common strategies include holding the property for more than 12 months to access the 50% discount, timing the sale to fall in a lower-income financial year, maximising your cost base by including all eligible purchase and improvement costs, and offsetting any available capital losses.
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