Capital Gains Tax on Property in Australia: The Complete Guide (2026)
A comprehensive guide to capital gains tax (CGT) on Australian property. Learn how CGT is calculated, the 50% discount, main residence exemption, 6-year absence rule, CGT on inherited property, cost base calculations, and legal strategies to minimise your tax.
Definition
Capital Gains Tax (CGT)
Capital gains tax is the tax you pay on the profit (capital gain) when you sell an asset — including investment property — for more than you paid for it. In Australia, CGT is not a separate tax; the capital gain is added to your assessable income and taxed at your marginal tax rate. A 50% discount applies for individuals who have held the asset for more than 12 months, and your main residence is generally exempt from CGT entirely.
Capital gains tax is one of the most significant tax considerations for Australian property investors. For a concise definition, see our glossary entry on capital gains tax on property. Understanding how CGT is calculated, what exemptions and discounts apply, and how to structure the timing of your sale can mean the difference between keeping a substantial portion of your profit and handing a large chunk to the ATO.
This guide covers everything you need to know about CGT as it applies to property in Australia, from basic calculations to advanced strategies for minimising your tax liability legally.
How Capital Gains Tax Is Calculated on Property
The basic formula for calculating a capital gain on property is:
Capital Gain = Sale Price - Cost Base
Your cost base is not simply the purchase price. It includes a range of costs associated with acquiring, holding, and selling the property. Understanding the full cost base is essential to minimising your CGT liability.
- 1
Determine the sale price (capital proceeds)
This is the total amount you receive for the property, including the contract price and any other consideration received. Deduct any selling costs — agent commissions (typically 1.5-3% of the sale price), auctioneer fees, advertising costs, legal and conveyancing fees for the sale, and styling or staging costs. These selling costs reduce your capital proceeds.
- 2
Calculate the cost base
Your cost base includes: (1) the original purchase price; (2) stamp duty (transfer duty) paid on acquisition; (3) conveyancing and legal fees for the purchase; (4) the cost of any capital improvements (renovations, extensions, structural works — not repairs or maintenance); (5) non-deductible holding costs if the property was acquired after 21 August 1991 and was not income-producing (e.g., vacant land you held without renting); and (6) the cost of title searches, survey fees, and valuation fees at purchase.
- 3
Subtract the cost base from the capital proceeds
Capital Gain = Capital Proceeds (after selling costs) minus Cost Base. If the result is positive, you have a capital gain. If negative, you have a capital loss, which can be carried forward to offset future capital gains (but cannot be offset against ordinary income).
- 4
Apply any available capital losses
If you have capital losses from the current year or carried forward from previous years, apply these against the gross capital gain before applying any discount. Capital losses must be applied before the 50% discount is calculated.
- 5
Apply the 50% CGT discount (if eligible)
If you are an individual (not a company) and you held the property for more than 12 months before selling, you are entitled to a 50% discount on the capital gain. This means only half of the net capital gain is added to your taxable income. Superannuation funds receive a one-third (33.33%) discount. Companies receive no discount.
- 6
Add the net capital gain to your taxable income
The discounted capital gain is added to your other assessable income for the financial year (salary, rental income, dividends, etc.) and taxed at your marginal tax rate. This is why timing the sale — and the income year in which the gain falls — matters. If you can sell in a year when your other income is lower, the gain will be taxed at a lower marginal rate.
Worked Example: CGT on an Investment Property
Let us work through a realistic example:
- Purchase price (2016): $550,000
- Stamp duty paid: $21,000
- Legal fees on purchase: $1,500
- Kitchen renovation (2019): $35,000
- New bathroom (2021): $18,000
- Sale price (2026): $850,000
- Agent commission (2%): $17,000
- Legal fees on sale: $1,800
- Marketing costs: $3,500
Cost base: $550,000 + $21,000 + $1,500 + $35,000 + $18,000 = $625,500
Net capital proceeds: $850,000 - $17,000 - $1,800 - $3,500 = $827,700
Gross capital gain: $827,700 - $625,500 = $202,200
After 50% discount (held more than 12 months): $202,200 x 50% = $101,100
This $101,100 is added to the investor's other taxable income for the year. If the investor's salary is $120,000, their total taxable income becomes $221,100. The capital gain portion would be taxed at the investor's marginal rate (45% plus 2% Medicare levy for income above $190,000 in 2025-26), resulting in a tax bill of approximately $42,000-$47,000 on the gain (depending on exactly how the gain straddles the tax brackets).
Keep every receipt. The higher your cost base, the lower your capital gain. Many investors miss legitimate cost base items — particularly stamp duty on purchase, legal fees, and capital improvement costs — because they did not keep records. The ATO requires you to keep records for the entire period you own the asset plus 5 years after you sell it.
The Main Residence Exemption
Your main residence (the home you live in) is generally fully exempt from CGT. This is one of the most valuable tax exemptions available to Australians. To qualify for the full exemption:
- The property must have been your main residence for the entire period you owned it.
- You must not have used any part of the property to produce income (e.g., renting out a room or operating a home business from a dedicated area).
- The land must not exceed 2 hectares.
- You can only have one main residence at a time (with a limited exception during the overlap period when you are selling one home and buying another).
Partial Main Residence Exemptions
If you used the property as your main residence for only part of the time you owned it — for example, you lived in it for 3 years, then rented it out for 5 years — you will receive a partial exemption. The exempt portion is calculated based on the number of days the property was your main residence divided by the total number of days you owned it.
The 6-Year Absence Rule
One of the most powerful CGT planning tools available to Australian property owners is the 6-year absence rule (also known as the 6-year temporary absence rule or the "6-year rule").
Under this 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 6 years — even though it is producing rental income. If you move back in before the 6-year period expires, the clock resets and you get another 6 years if you move out again.
Key conditions:
- You must have actually lived in the property as your main residence before claiming the absence exemption.
- You cannot treat another property as your main residence during the same period. You can only nominate one property at a time.
- If the absence exceeds 6 years, the exemption applies for the first 6 years only. A partial CGT liability applies to the period beyond 6 years.
- The 6-year rule applies even if you go overseas or rent another property to live in.
The 6-year rule in practice: Imagine you buy a home for $600,000, live in it for 2 years, then move interstate for work and rent it out for 5 years, then sell it for $900,000. Because the rental period (5 years) is within the 6-year limit, the entire $300,000 gain is exempt from CGT. Without the 6-year rule, a significant portion of that gain would be taxable. This rule makes it much easier to relocate temporarily without triggering a CGT event.
CGT on Inherited Property
When you inherit a property, the CGT rules depend on when the deceased person acquired the property and how they used it.
Properties Acquired by the Deceased Before 20 September 1985 (Pre-CGT)
If the deceased acquired the property before 20 September 1985, the cost base for CGT purposes is the market value of the property at the date of death (not the original purchase price). When you sell the property, your capital gain is calculated as the sale price minus the market value at the date of death, minus any capital improvements you made and selling costs.
Properties Acquired by the Deceased After 20 September 1985 (Post-CGT)
If the deceased acquired the property after 20 September 1985, you inherit their cost base. Your capital gain is calculated as if you had bought the property at the same price and time as the deceased. You are also eligible for the 50% discount if the combined holding period (the deceased's plus yours) exceeds 12 months.
The Main Residence Exemption for Inherited Property
If the inherited property was the deceased's main residence just before they died (and was not being used to produce income), it is generally exempt from CGT provided:
- You sell the property within 2 years of the deceased's death; or
- The property becomes your main residence and you do not use it to produce income.
If you do not sell within 2 years and do not move in, CGT applies from the date of death. The ATO may grant extensions to the 2-year period in certain circumstances (e.g., delays in obtaining probate, family disputes, or natural disasters).
Strategies to Minimise CGT Legally
- 1
Hold for more than 12 months
The simplest and most effective strategy. By holding the property for at least 12 months and 1 day before selling, individuals receive a 50% discount on the capital gain. This effectively halves the tax on the gain. If you are approaching the 12-month mark, delaying settlement by even a few weeks can save you thousands in tax.
- 2
Maximise your cost base
Include every legitimate cost in your cost base calculation. Stamp duty, legal fees, capital improvements, and certain holding costs all reduce your taxable gain. Keep receipts for everything. Common overlooked items include: quantity surveyor fees, strata improvement levies, landscaping that is a capital improvement (not maintenance), and the cost of obtaining council approvals for renovations.
- 3
Time the sale to a low-income year
Because the capital gain is added to your assessable income and taxed at your marginal rate, selling in a year when your other income is low (e.g., after retirement, during a career break, or a year with significant deductions) can push the gain into a lower tax bracket. Even moving the sale from June to July (a different financial year) can make a meaningful difference.
- 4
Offset capital gains with capital losses
Capital losses from other investments (shares, managed funds, other properties) can be offset against your property capital gain. If you have investments that are currently at a loss, selling them in the same financial year as a profitable property sale can reduce your net capital gain. Losses can also be carried forward indefinitely to offset future gains.
- 5
Use the main residence exemption strategically
If you have multiple properties, careful nomination of your main residence (and use of the 6-year absence rule) can maximise your CGT-free gains. You can only have one main residence at a time, but strategic planning around when you live in and rent out different properties can optimise your overall CGT position over a lifetime.
- 6
Consider ownership structure
The entity that owns the property determines how CGT is applied. Individuals receive the 50% discount. Superannuation funds receive a 33.33% discount. Companies pay CGT at the company tax rate (25-30%) with no discount. Trusts can distribute capital gains to beneficiaries in lower tax brackets. Ownership structure should be considered at the time of purchase — it is difficult and expensive to change later.
- 7
Make a CGT small business concession claim (if eligible)
If the property is an active business asset (e.g., commercial property used in your business) and you meet the small business entity thresholds, you may be eligible for the CGT small business concessions, which can reduce or eliminate the capital gain entirely. These concessions are complex and require specific eligibility criteria to be met.
CGT Record Keeping Requirements
The ATO requires meticulous record keeping for CGT purposes. For property, you must keep records for the entire period of ownership plus 5 years after lodging the tax return that includes the capital gain or loss. Essential records include:
- Purchase contract and settlement statement: Documenting the original purchase price and all associated costs.
- Stamp duty receipts: The transfer duty paid at purchase.
- Receipts for capital improvements: Every renovation, extension, or structural improvement, with invoices, quotes, and proof of payment.
- Depreciation schedules: These affect your cost base calculation because depreciation claimed on plant and equipment reduces the cost base of those items.
- Records of periods of income production: If the property was sometimes your home and sometimes rented out, you need records of the dates for each period.
- Selling costs: Agent commissions, legal fees, advertising, and any other costs associated with the sale.
- Valuation reports: If a market valuation was obtained at any relevant point (e.g., at the date of death for inherited property, or when the property changed from main residence to investment), keep the valuation report.
Depreciation affects your cost base. If you have claimed depreciation on plant and equipment (Division 40) items in your investment property, the cost base of those items is reduced by the depreciation claimed. This means depreciation gives you a tax deduction each year but increases your eventual CGT liability. It is still almost always beneficial overall — the annual tax savings typically outweigh the marginal CGT increase — but it is important to understand the trade-off. Capital works deductions (Division 43) do not affect the cost base.
Common CGT Mistakes to Avoid
- Forgetting to include all cost base items. Many investors only use the purchase price as their cost base, missing stamp duty, legal fees, and capital improvements. This can overstate the gain by tens of thousands of dollars.
- Not keeping adequate records. If you cannot substantiate a cost base item with a receipt or other evidence, the ATO may disallow it. Digital copies of receipts are acceptable — photograph and store every receipt related to your investment property.
- Selling just before the 12-month mark. Selling at 11 months and 29 days means you miss the 50% discount entirely. On a $200,000 gain at a 39% marginal rate (including Medicare levy), the discount saves approximately $39,000 in tax. Always check the settlement date — it is the contract date (or settlement date in some circumstances) that determines the holding period.
- Ignoring the CGT consequences of negative gearing. Plant and equipment depreciation claimed during the negatively geared holding period reduces your cost base, increasing the eventual capital gain. Factor this into your long-term financial planning.
- Assuming the main residence exemption applies automatically. The exemption requires the property to have been your main residence. Simply owning a property and occasionally staying there does not qualify it. The ATO considers factors like where you receive mail, your electoral enrolment, and where your family lives.
- Not getting professional advice. CGT on property involves complex rules, multiple exemptions, and significant amounts of money. A tax accountant or financial adviser who specialises in property can often save you far more in tax than their fee costs.
Frequently Asked Questions
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Analyse Your Sale ContractRelated Guides
- Negative Gearing Explained — How negative gearing works, tax implications, and how depreciation affects your investment returns.
- Property Investing Guide — A comprehensive introduction to building a property investment portfolio in Australia.
- What Is Stamp Duty? — Understanding stamp duty and how it forms part of your CGT cost base.
- First Home Buyer Guide — Complete guide to buying your first home, including how the main residence exemption protects your investment.
- Property Investment for Beginners — Essential reading if you are new to investing and want to understand CGT in the broader context of building a portfolio.