Property is often an investor’s largest asset, so the capital gains tax (CGT) on selling an investment property can be substantial — but it is also where careful record-keeping pays off the most. A correctly built cost base, the 50% discount and an understanding of how depreciation and the main residence rules interact can make a large difference to the final bill.
Try it: estimate the tax on an investment-property sale with the Capital Gains Tax Calculator.
This guide sits under our pillar, capital gains tax in Australia. If the property has ever been your home, read it alongside the main residence CGT exemption and six-year rule.
When CGT applies to property
CGT applies when you dispose of an investment property — usually by selling it. Crucially, the CGT event date is the contract date, not the settlement date. A contract signed in June that settles in July still falls in the earlier financial year, which can matter enormously for a six-figure gain.
Your main residence is generally exempt, so most people never pay CGT on the family home. CGT is squarely aimed at investment properties, holiday houses and land held as an investment.
Building the property cost base
For property, the cost base has more moving parts than for shares, and each element reduces your taxable gain:
| Cost base element | Property examples |
|---|---|
| Acquisition cost | Purchase price |
| Incidental costs | Stamp duty, conveyancing and legal fees, buyer’s agent fees, selling agent commission |
| Ownership costs | Rates, land tax, insurance and interest — only if not already claimed as deductions |
| Capital improvements | Renovations, extensions, a new kitchen, a granny flat |
| Title costs | Costs of establishing or defending your title |
The single biggest trap is double-dipping: if you have already claimed rates, interest or insurance as tax deductions against the rental income, you cannot also include them in the cost base. Ownership costs only go into the cost base for periods when they were not deductible.
Capital improvements vs repairs
- Capital improvements (a new deck, a full renovation) are added to the cost base and reduce your gain.
- Repairs and maintenance (fixing a leaking tap, repainting) are usually claimed as deductions during ownership and do not go into the cost base.
Keep every invoice for major works — improvements made years ago still count.
Depreciation and the cost base
If you claimed capital works deductions (building depreciation, often 2.5% a year) while renting the property, those amounts generally have to be subtracted from the cost base when you sell. In effect, deductions you enjoyed during ownership increase your capital gain at the end. This “clawback” surprises many investors, so factor it into any estimate. Your quantity surveyor’s depreciation schedule and your past tax returns are the records you will need.
The 50% discount on property
If you are an individual (or trust) and have owned the property for more than 12 months, you can apply the 50% CGT discount — only half the gain is taxed. Super funds get 33.3%, and property sold by an SMSF in pension phase can be effectively tax-free. Companies get no discount. See the CGT discount and 12-month rule for the detail.
Interaction with the main residence
If a property was your home for part of the time and an investment for another part, the exemption is usually partial — the gain is apportioned across the days it was and wasn’t your main residence. The six-year absence rule can even keep a former home fully exempt for up to six years of renting, in some cases. These rules are detailed in the main residence CGT exemption. Get them right, because they can turn a taxable gain into an exempt one.
Worked example: selling an investment property
Anh bought an investment unit and is now selling it. She has owned it for six years.
- Purchase price: $520,000
- Stamp duty and legal on purchase: $24,000
- Kitchen and bathroom renovation (capital improvement): $46,000
- Selling agent commission and legal: $18,000
- Sale price: $760,000
- Capital works (building) deductions claimed over the years: $32,000
| Item | Amount |
|---|---|
| Capital proceeds ($760,000 − $18,000) | $742,000 |
| Cost base ($520,000 + $24,000 + $46,000) | $590,000 |
| Less capital works deductions claimed | −$32,000 |
| Adjusted cost base | $558,000 |
| Gross capital gain ($742,000 − $558,000) | $184,000 |
| 50% discount (held >12 months) | −$92,000 |
| Net capital gain added to income | $92,000 |
Anh adds $92,000 to her taxable income for the year of the contract and pays tax at her marginal tax rate. Note how the $32,000 depreciation clawback increased the gain, while the renovation and buying/selling costs reduced it.
Strategies to manage property CGT
- Time the contract. A one-off gain is taxed at your marginal rate, so selling in a lower-income year — or splitting settlement across financial years is not possible, but choosing the contract date is — can reduce tax. See how to reduce CGT legally.
- Keep every cost record for the entire ownership period, including improvements.
- Use capital losses from shares or other assets to offset the gain — see capital losses and carry-forward.
- Check the main residence rules before assuming any gain is taxable.
Off-the-plan, land and subdividing
Not every property gain is a straightforward CGT gain. If you buy land, subdivide it and sell the blocks, or develop property in a way that looks like a business or a profit-making venture, the profit can be taxed as ordinary income rather than as a capital gain — which means no 50% discount. The line between a capital investment and a profit-making scheme depends on your intention and the scale of what you do. If you are subdividing or developing, get advice early, because the tax treatment (and whether GST applies) can be very different from a simple buy-and-hold investment.
For off-the-plan purchases, remember the acquisition date for the 12-month discount test is generally when you sign the contract, not when the building is completed — which can help you reach the 12-month mark sooner than you might expect.
Non-residents and property
If you become a foreign resident for tax purposes while owning Australian property, the CGT rules change. The 50% discount has been restricted for periods of foreign residency, and foreign residents are excluded from the main residence exemption in most cases. There is also a foreign resident capital gains withholding regime that requires a portion of the sale price to be withheld at settlement unless a clearance certificate is provided. If your residency has changed during ownership, check the current rules at ato.gov.au before selling.
Common pitfalls
- Ignoring the depreciation clawback, which increases the gain.
- Double-counting interest or rates already claimed as deductions.
- Using the settlement date instead of the contract date.
- Losing renovation invoices, forfeiting cost-base additions.
- Assuming a former home is fully exempt without checking the apportionment and six-year rules.
If you are weighing property against equities, our shares vs property in Australia comparison looks at both the returns and the tax treatment side by side.
This article is general information only and not financial or tax advice; consider your own circumstances and speak to a licensed adviser or the ATO before acting.