Capital Gains Tax on Property in Australia: How It Works and How to Reduce It

Sell an investment property for more than you paid, and the ATO wants a share of the gain. That is capital gains tax. It is not a separate tax, it is added to your income in the year you sell and taxed at your marginal rate. For a lot of property investors, it is the single biggest cost of the entire investment, and it usually arrives as a surprise.

The good news is that CGT has more exemptions, discounts, and timing levers than almost any other part of the Australian tax system. If you understand how it works before you buy, sell, or even move house, you can legally shave tens of thousands of dollars off the bill.

Here is how CGT on property actually works, the exemptions that matter, and the choices that change what you end up paying.

What CGT is and when it applies

A capital gain is the difference between what you paid for an asset and what you sold it for, adjusted for some allowable costs. If that number is positive, it is a capital gain. If it is negative, it is a capital loss.

Capital gains tax applies whenever a CGT event happens to a property you own. The most common CGT event is selling, but the list also includes gifting the property, transferring it to a family member or trust, losing it to compulsory acquisition, or having it destroyed.

A few rules to keep in mind before going further:

• CGT does not apply to property you bought before 20 September 1985. That cut-off date is when the tax was introduced, and pre-CGT assets are grandfathered out.
• CGT is not a separate tax. The net capital gain for the year is added to your taxable income and taxed at your marginal rate.
• The CGT event happens on the contract date, not settlement. If you sign a contract in June and settle in August, the gain falls in the June financial year.

That last point catches a lot of sellers out. Timing the contract date across financial years can move tens of thousands of dollars between tax years.

The main residence exemption

The single most valuable rule in the entire CGT system, for most Australians, is the main residence exemption.

If a property is your main residence for the whole time you own it, the capital gain on sale is fully exempt from CGT. You can sell your family home for a million dollars more than you paid and pay no tax on the gain.

To qualify for the full exemption:

• The dwelling must have been your home.
• You must have lived in it.
• You must not have used it to produce income during your ownership period.
• The land it sits on must be two hectares or less.

That last point matters for rural and large-block properties. Land over two hectares can have a partial exemption, but the area above the threshold is treated separately.

The exemption can also be partial. If the property was your home for some of the ownership period and an investment for other periods, the gain is apportioned based on the days each.

The six-year rule

One of the most useful provisions in the CGT system is what is informally called the six-year rule.

If you move out of your main residence and rent it out, you can still treat it as your main residence for CGT purposes for up to six years from when you moved out. As long as you do not nominate another property as your main residence during that time, the original property remains exempt.

If you move back in before the six years is up, the clock resets. You can move out again, rent it out for another six years, and continue to keep the exemption.

If you move out and never rent the property out, the exemption can continue indefinitely.

This is one of the reasons people who travel, work overseas, or move temporarily for work often keep their first home rather than sell. The exemption survives the move, the property earns rental income, and the eventual sale stays tax-free.

The catch is that you can only have one main residence at a time. If you buy a second home and live in it, you have to choose which one to nominate as your main residence for CGT purposes, and the other one starts accruing a CGT liability from that point.

The 50 percent discount

If you hold a property for more than 12 months and you are an Australian resident individual, you only pay CGT on half of the net capital gain.

That single rule is the reason so many property investors hold for the long term. Sell at 11 months and you pay tax on 100 percent of the gain. Sell at 13 months and you pay tax on 50 percent.

The 50 percent discount applies to individuals and most trusts. It does not apply to companies. A company selling a property pays tax on the full gain at the company tax rate.

For self-managed super funds, the discount is one-third rather than half, and only applies if the fund is in accumulation phase. If the fund is fully in pension phase, the gain is usually tax-free.

How the calculation actually works

The calculation has four parts.

1. Work out the sale proceeds. This is the gross sale price, minus selling costs like agent commission, marketing, and conveyancing on the sale.

2. Work out the cost base. This is the purchase price plus a long list of allowable costs:

• Stamp duty paid on the original purchase.
• Legal and conveyancing fees on purchase and sale.
• Buyer's agent fees.
• Loan establishment costs (sometimes).
• Capital improvements: extensions, renovations, structural work.
• Holding costs if the property was not income-producing: rates, insurance, interest on a vacant land period.

What you cannot include in the cost base are deductions you have already claimed against rental income. You cannot double-dip.

3. Subtract cost base from sale proceeds. The result is the gross capital gain.

4. Apply discounts and offsets. Offset any capital losses from previous years. Then apply the 50 percent discount if eligible. The result is the assessable capital gain that gets added to your taxable income.

A worked example

Take an investor who bought a Brisbane investment property in 2018 for $600,000. Stamp duty was $20,000. Legal fees $2,000. Over the years, they spent $60,000 on a new kitchen and bathroom. They sell in 2026 for $950,000. Agent commission is $20,000. Legal fees on sale $2,000.

Cost base: $600,000 + $20,000 + $2,000 + $60,000 = $682,000

Sale proceeds: $950,000 - $20,000 - $2,000 = $928,000

Gross capital gain: $928,000 - $682,000 = $246,000

50 percent discount (held more than 12 months): $246,000 / 2 = $123,000

The $123,000 gets added to the investor's taxable income for the year the contract was signed. If they earn $180,000 from their day job, that gain is taxed entirely at 45 percent, so the CGT bill is about $55,000.

Notice how much of the gain is absorbed by costs. The headline number is $350,000, but after costs and the discount, only $123,000 is taxable. Most sellers underestimate this by skipping the cost base work.

CGT on inherited property

When you inherit a property, you do not pay CGT at the time of inheritance. CGT applies later, when you sell it.

The cost base depends on when the original owner bought it.

• If the deceased acquired the property before 20 September 1985, your cost base becomes the market value at the date of their death.
• If the deceased acquired it after that date, you inherit their original cost base, including the date they acquired it.

There is also a two-year rule worth knowing. If the property was the deceased's main residence and you sell it within two years of the date of death, the sale is fully CGT-exempt. The two-year clock can be extended in some cases, including delays caused by estate administration.

This is why estate planning timing matters. Selling an inherited family home in year one is often tax-free. Selling in year three can trigger significant CGT.

Property used to earn income

The moment a main residence is used to produce income, even partially, the CGT exemption starts to erode.

Renting out a room. Listing on Airbnb. Running a business from a home office that has a separate entrance and is exclusive to the business. All of these reduce the main residence exemption proportionally to the floor area used for income and the time it was used that way.

There is one more catch. When you first start using a former main residence to produce income, the ATO treats you as having acquired the property at market value on that date. This is called the home first used to produce income rule. It can work in your favour because it resets the cost base to the date you moved out, rather than the original purchase price.

If you are moving out and renting your home, get a written market valuation as of the date you move out. That number is what the ATO will work from, and you cannot reconstruct it three years later.

Foreign residents and the lost exemption

If you are not an Australian tax resident at the time you sell a property, you cannot use the main residence exemption.

This rule changed in 2019 and caught a lot of Australians overseas off guard. Even if the property was your main residence for decades, if you have moved overseas and become a non-resident for tax purposes, selling while non-resident means the full gain is taxable.

There are limited exceptions for short-term absences and life events like serious illness or death, but they are narrow.

For Australians working overseas, this rule alone can be worth tens or hundreds of thousands of dollars. If you are planning to sell a former home, the answer is often to return to Australia and re-establish residency before the contract is signed.

Strategies that actually reduce CGT

A few approaches come up again and again with property investors who manage CGT well.

Hold for more than 12 months. This is the easiest one. If you are close to the 12-month mark, work out whether waiting another month or two is worth the 50 percent discount. It almost always is.

Time the contract date. CGT falls in the financial year of the contract date. If you have a low-income year coming up (a sabbatical, parental leave, retirement), pushing the sale into that year drops your marginal rate.

Bundle losses with gains. Capital losses can be carried forward indefinitely and used to offset future capital gains. If you have a loss-making asset (shares, an underperforming property), realising the loss in the same year as a property sale can soak up the gain.

Track every cost base item. Renovations, capital improvements, holding costs while the property is vacant, even some legal fees and borrowing costs. Each one reduces the gain. Keep receipts and a running cost base log from day one.

Use the six-year rule deliberately. If you can structure a move so that your former home is rented out for up to six years while you live elsewhere, you can keep the main residence exemption.

Get a valuation when you switch use. If a main residence becomes a rental, get a market valuation that day. The cost base resets to that valuation, not the original purchase price.

Consider superannuation contributions. A concessional contribution to super in the same year as a capital gain reduces taxable income for that year. There are caps and timing rules, so this is one to plan with an accountant.

Look at small business CGT concessions. If the property is used in a business you run, there are four small business CGT concessions that can reduce or even eliminate the gain. The rules are tight and the thresholds matter, but for business owners it can be transformative.

Records to keep, from day one

CGT calculations rely on records that go back to the day you bought the property. The ATO can ask for them years later.

Keep:

• Contract of sale (purchase and eventual sale).
• Settlement statement.
• Stamp duty receipt.
• Legal and conveyancing invoices.
• Buyer's agent invoice if used.
• Every invoice for capital improvements, with photos if possible.
• Rates notices and insurance bills if the property has had a vacant period.
• A market valuation on any date the property changes use (moving in, moving out, starting Airbnb).

Most people do not keep these well. Set up a single folder per property the day you buy. Save scans of everything. Future-you will save thousands of dollars in tax with an extra ten minutes of filing each year.

The bottom line

CGT on property in Australia is generous if you know the rules and brutal if you do not. The main residence exemption, the 50 percent discount, the six-year rule, and the cost base mechanics together mean that two investors with the same gain can pay wildly different amounts of tax.

The biggest mistakes are not knowing about exemptions in time, signing a sale contract in the wrong financial year, losing receipts, and selling while non-resident.

If you are planning to sell a property in the next year or two, sit down with an accountant before you list. The cost of an hour of professional advice is small compared to the cost of getting CGT wrong.

For more on how property tax decisions intersect with investment strategy, see our guides on negative gearing in Australia and land tax for property investors.