Capital Gains Tax on Property in Australia: A Plain-Language Guide for Investors

Capital gains tax is an area of Australian tax law that many property investors understand only vaguely until they sell a property and discover the liability they have accumulated. Getting the basics right before you buy, hold and sell is far better than discovering the implications at the point of disposal.

What Is Capital Gains Tax in the Context of Property?

When you sell an asset for more than you paid for it, the profit is called a capital gain. In Australia, most capital gains are included in your assessable income for the year you sell and taxed at your marginal income tax rate.

For most Australians, their home is their most significant asset. The rules around which properties are subject to CGT and which are exempt are therefore critically important.

The Principal Place of Residence Exemption

The most significant CGT rule in Australian property is the principal place of residence (PPOR) exemption. A property that has been your home throughout the entire period you owned it is fully exempt from CGT when you sell.

This exemption is the reason most Australian homeowners do not think about CGT: if you buy a house, live in it, and sell it, you pay no CGT regardless of how much the property has increased in value.

The exemption has conditions:

The property must be in Australia.

You must have actually lived in it as your main residence.

The land must be two hectares or less (for the full exemption).

If you have also used the property to produce income, for example renting out a room, part of the property may lose the PPOR exemption.

Investment Properties: Full CGT Applies

When you sell an investment property that you have never lived in, the full capital gain is assessable income in the year of sale, subject to the 50 per cent CGT discount if you have held the property for more than 12 months.

How the 50 Per Cent CGT Discount Works

If you have owned the investment property for more than 12 months before selling, only 50 per cent of your capital gain is included in your assessable income. This discount is available to individuals and trustees of discretionary trusts. It is not available to companies.

A $300,000 capital gain on a property held for more than 12 months results in $150,000 of assessable income. At a marginal tax rate of 37 per cent, the CGT payable is $55,500. Without the discount, it would be $111,000.

How to Calculate Your Capital Gain

The capital gain is calculated as:

Sale price minus cost base equals capital gain.

The cost base includes:

The original purchase price.

Stamp duty and other purchase costs.

Legal and conveyancing fees.

Capital improvements made during ownership (renovations that add value, not repairs and maintenance).

Selling costs including agent's commission and legal fees.

Keep records of all these costs throughout the ownership period, because they reduce your capital gain and, therefore, your tax liability when you sell. Losing these records costs you money.

Selling Costs and Cost Base

The selling costs such as agent's commission and legal fees at the time of sale are included in the cost base calculation, reducing the net capital gain. If you sell for $950,000 with selling costs of $25,000, the effective proceeds for CGT purposes are $925,000.

The Six-Year Rule: Renting Out Your PPOR

One of the most useful concessions in Australian CGT law for property is the six-year absence rule.

If you move out of your home and rent it out, you can continue to treat it as your PPOR for CGT purposes for up to six years. If you sell within those six years, the full PPOR exemption still applies.

This is particularly useful for people who need to relocate for work, travel or other reasons but intend to return, or who are transitioning between properties and want to rent out their existing home in the interim.

The six-year rule resets each time you move back into the property as your PPOR.

Partial Exemption: Properties That Were Both a Home and an Investment

If you lived in a property for part of your ownership and rented it out for the rest, the CGT calculation is apportioned.

The portion of ownership during which the property was your PPOR is exempt. The portion during which it was rented is assessable. The split is calculated based on the proportion of time in each use.

This is a common situation for investors who originally bought a property as their home, later moved out and converted it to an investment, and eventually sell. The taxable component is the rental period.

Timing a Sale and CGT

The CGT event is recorded in the financial year in which the sale contract is exchanged, not settlement. Planning the timing of a sale can have tax implications if it places you in a different marginal tax bracket.

In some cases it may be advantageous to exchange contracts just after the start of a new financial year rather than before the end of the current one, particularly if the gain is large or your other income will be lower in the following year.

CGT for Jointly Owned Properties

When two people own a property jointly, the capital gain is split between them in proportion to their ownership interest. Each person then applies their own tax position, marginal rate and available offsets to their share of the gain.

A couple where one partner earns significantly less than the other may benefit from structuring ownership so that the lower-income partner holds a larger share of the investment property, as their marginal rate on the capital gain will be lower.

Use the tools at HomeLoanTools.com.au to understand the financing side of your property investment journey, and make sure you are working with a qualified accountant on the tax side.