Capital gains tax is an area of taxation that often confuses property investors. The legislation can appear complex, however it’s important for all investors to have a good understanding of it before selling an asset.
Capital gains tax is the fee you pay on any profit made from the sale of an investment property. This profit is referred to as a capital gain and is the difference between what you paid for the property (your cost base) and what you sold it for. It’s included in your assessable income and taxed at your marginal rate.
In this article, we will cover:
- When do you pay capital gains tax on investment property?
- How to calculate capital gains tax
- Capital gains tax methods
- Capital gains tax exemptions
- Depreciation and capital gains tax
When do you pay capital gains tax on investment property?
A capital gains tax (CGT) event occurs when an asset is sold. The timing of this is important as it determines the income year the tax will be applied. For property investors, a CGT event is triggered when you enter into a contract of sale and therefore stop being the owner of the property. The CGT is then applied in the same financial year you sold your property.
It’s important to keep thorough records of this process so you can correctly calculate the amount of capital gain or capital loss you make. Property investors are required to keep these records for five years after the CGT event occurs.
This is particularly important when you make a capital loss, as the amount can be carried forward as part of unapplied net capital losses. A capital loss does not reduce a taxpayer’s assessable income. Instead, taxpayers are able to offset the loss against a capital gain in the current or future financial years.
How to calculate capital gains tax
A basic formula for calculating CGT is:
Selling price – transaction costs – original purchase price + associated transaction costs = capital gain (or loss)
If you have bought and sold an investment property within 12 months, your net capital gain will be added to your taxable income for that year. However, if you have owned an investment property for more than 12 months, there are two methods to calculate your net capital gain – discount and indexation. Depending on eligibility, you can choose whichever method reduces your capital gain the most.
Capital gains tax discount method
Property investor who have owned an investment property for more than 12 months are entitled to specific concessions when calculating CGT. If you’re an Australian resident and have held the property for more than one year, you’re eligible for a 50 per cent discount on your net capital gain. This reduces your assessable income and therefore the amount of tax you will pay.
Capital gains tax Indexation method
If you are an Australian resident who purchased an investment property before 21st September 1999, you are eligible to use the indexation method. The indexation method accounts for inflation and therefore calculates your net capital gain based on what your property would be worth in today’s property market. The calculation divides the consumer price index (CPI) at the time you sold your property by the CPI at the time you bought the property. As a result, your initial purchase price is likely to be increased, and your capital gain reduced.
Capital gains tax exemptions
There are certain circumstances in which CGT can be exempt. CGT exemptions include 50 per cent discount, principal place of residence, six year rule and six month rule.
50 per cent rule: As previously mentioned, property investor who have owned an investment property for more than 12 months are entitled to a 50 per cent discount on CGT.
Primary place of residence: This refers to when a person resides, occupies and lives in a property as their home. If a property is considered an owner’s primary place of residence, they are entitled to a full CGT exemption.
Six year rule: If a property owner moves out of a primary place of residence and rents it out, they can claim an exemption from CGT for a period of up to six years. If a property owner moves back into the property and afterwards moves out again then a new six year period commences from the time they last moved out.
Six month rule: There are exemptions from CGT if a property owner considers more than one property to be a primary place of residence within a six month period. The property owner must meet one of the below conditions:
- The old property was the owner’s primary residence for a period of at least three months in the twelve months before they sold it
- An owner did not use the property to provide assessable income in any part of the twelve months prior to selling
Depreciation and capital gains tax
Capital gain is your profit minus your cost base. Depreciation impacts your cost base and therefore affects CGT. Depreciation deductions can be claimed under two categories – plant and equipment deductions and capital works depreciation. Both can affect your cost base in different ways.
To find out more, read Does Depreciation Affect Capital Gains Tax?
Hello,
Thank you for this informative article. We purchased a property in 2019, lived in it for two years, rented it out for two years, and now plan to sell.
Unfortunately it looks like the property will sell at a loss. Are we able to claim this loss through tax even though we would otherwise not be subject to paying CGT because of the 6 year rule?
Thanks for your help.
Hi Amy,
Thanks for your comment.
When a property is sold at a net capital loss, the loss may be carried forward and deducted from capital gains in later years. For more information click here.
As we’re only specialised in depreciation, we recommend consulting an accountant or financial advisor for advice regarding your individual scenario.
Thanks,
The BMT Team.
Hi,
We purchased our home in Dec 1999 lived in it until June 2013. We moved for work and rented out our home and now want to sell. I realise we will have some sort of CGT but is there any reduction as it was our home first?
Hi Louise,
The property will be eligible for a fifty per cent discount to CGT as it’s been owned for longer than twelve months and a proportion will be exempt calculated on the percentage the property was used as a primary place of residence.
As we only specialise on CGT as directly related to depreciation, we recommend consulting an accountant or financial adviser for advice specific to your scenario.
Thanks,
The BMT Team.
Hello,
I purchased a property in April 2015. I lived in it for 11 months, then rented it out from March 2016 – May 2023 (7 years). Its now just on the market for sale. Am I exempt from any CGT?
Many thanks!
Brie
Hi Brie,
The property will be eligible for a fifty per cent discount to CGT as it’s been owned for longer than twelve months and a proportion will be exempt calculated on the percentage the property was used as a primary place of residence.
As we only specialise on CGT as directly related to depreciation, we recommend consulting an accountant or financial adviser for advice specific to your scenario.
Thanks,
The BMT Team.
Hi
We have bought an investment property in ACT in July 2022 and currently rented out.
we have plan to sell it due to the current interest rate hiking by end of July .
Do I need to pay GST on my sales ?
Thanks
Hi Mathew,
Thanks for your comment.
As were only specialised in providing information on capital gains tax as directly related to depreciation, we recommend consulting your accountant or financial advisor.
Thanks,
The BMT Team.
We bought an investment property in 2009 which was rented until In 2017 when we sold our primary residence and moved into the investment property.
We have lived in this property for 6 years.
What is our CGT liability? Is the capital gain worked out on valuation of property at the time it became our main residence? or when we sell?
Hi Diana,
The property will be eligible for a fifty per cent discount to CGT as it’s been owned for longer than twelve months and a proportion will be exempt calculated on the percentage the property was used as a primary place of residence.
Capital gains tax is calculated based on the cost base when you first purchased the property.
As we only specialise on CGT as directly related to depreciation, we recommend consulting an accountant or financial adviser to calculate a potential CGT liability.
Thanks,
The BMT Team
Hi
We bought a house in 2000 and bought another house in March 2020 in which we still live in.
We have rented out our former PPR since March 2020
We want to sell out current home to move back to the one which is rented
Can we claim CGT exemption on current PPR when we sell and also on 1st one if we sold it in 5 or so yrs?
Kaye
Hi Kaye,
Thanks for your comment.
You will be exempt from CGT on your current house if you elect to have this as your PPOR.
As the first house has been rented and if you claim PPOR on your current house, there will be CGT implications though you should be entitled to a partial main residence exemption.
Your accountant can help you determine which property will have the most tax-effective benefits regarding the exemption.
Thanks,
The BMT Team.
Hi,
BMT Team.
I’m Australian citizen I purchased 2 investment properties in 2013 & 2015 both have been rented out as investments from purchase up to now & both receive depreciation schedules through you guys, I am currently living in a rented property & want to know if I move into 1 of my properties as PPOR can I claim full exemption on CGT if I then sell that property at a later date ( say 12 to 18 months later ) or am I only able to claim 50% discount on CGT as Australian resident.
Hi Barry,
Thanks for your comment.
As the property was an investment from purchase you cannot claim a full exemption. However, once the property is declared your primary place of residence (PPOR) it will be eligible for a capital gains tax (CGT) partial exemption. This will be calculated depending on how long the property has been owned, how long it has been used to produce an income and how long it’s been your PPOR.
Because you have owned the property for longer than twelve months it will also be eligible for a 50 per cent discount on CGT.
We recommend discussing this scenario with your accountant before making decisions.
Thanks
The BMT Team.
I bought my house and lived in it since 2011, and in 2017, and within two years, I built a unit in the back of my old house and divided the land into two units. After completion, I moved to live in the back unit and rented the house or front unit until now. Can I get like exempt from Capitol ganes to if I sell the front house?
Hi Ali,
Thanks for your comment.
Because the property has been used to produce an income there will be capital gains tax (CGT).
We recommend consulting an accountant as we are only qualified to provide advice on CGT as directly related to tax depreciation.
Thanks
The BMT Team
Hi,
I purchased a house and land package as an investment property and have rented the house from 10 days after the handover date. I have asked many different people in the property industry and the ATO (twice) on when the 12 months for the CGT discount starts. Not one person has given me the same answer.
Is it from when you sign the land contract?
Is it from the handover date with the builder?
Is it from when the first tenant moved in?
My next question is what date does the ATO use to mark the sale date?
Is it when you have a contract signed with the potential new owner or is it the settlement date?
I am certain I am not the first person to have an investment property this way, so I am wondering why it is not clear on the ATO website or from people in the industry in many different jobs what the actual rule is to this very common situation?
Hello Jamie,
Thanks for your comment.
As we are only qualified to provide advice on capital gains tax (CGT) as directly related to depreciation we recommend you consult an accountant or financial advisor.
Thanks,
The BMT Team
My husband and I bought an investment property in 1989 and we are wanting to sell now. I would like to know if we are exempt from Capitol ganes, if we had the house since then
Could you help us understand what’s the law about CGT please
Thank you
Hi Nevenka,
Thanks for your comment.
CGT was introduced in 1985, this means it will be applied to your investment as it was purchased in 1989.
The amount of CGT will depend on your individual circumstances. Since you have owned the property for more than 12 months you should be eligible for the 50 per cent discount. However, we recommend getting in touch with your accountant to discuss.
Thanks,
The BMT Team.
My parents want to sell me their investment property which I live in (they never have) for around $500,000. They have owned the house for more than twenty years. Bought it very cheap at a government auction. It’s worth somewhere around $850,000 to $900,000 . If they do sell it to me, what tax implications will there be? Will the capital gains tax be 15% of market value? Or fifteen percent of sale price? Stamp duty?
Hi Tim,
Thanks for your comment.
We recommend getting in touch with your accountant to discuss the CGT implications of the property. They are experts in this area and will be able to provide the appropriate advice.
In terms of stamp duty, if this is the first property you have purchased you may be eligible for your state or territory’s stamp duty concession available to first home buyers.
Thanks,
The BMT Team
Property purchased in 1991 and rented out until 2005. Divorce and in property settlement I got this property. Had to spend 180000 to make it lovable and have lived here since. Want to sell. Do I need to pay cgt?
Hi,
Thanks for your comment.
You may be eligible for a full or partial CGT exemption if the property is classed as your main residence when it is sold.
We recommend getting in touch with your accountant as they will be able to provide further advice based on your individual scenario.
Thanks,
The BMT Team
Hi,
My wife and I purchased an investment property together in 2018. We are going through a divorce and financial settlement, and as part of this, I will be taking on the investment property and the associated mortgage on the property. Does my ownership status start in 2018 or does it restart with the re-doing of the property ownership. If it recommences, is the original purchase price used to calculate CGT on a sale or is a new value set?
Hi Ronald,
Thanks for your comment.
Our understanding is that the purchase price stays the same as it was when you originally purchased the property. It would only change if your wife was previously the sole owner of the property and sold it to you.
We recommend getting in touch with your accountant if you have any further questions regarding CGT and how it works on the sale of an income-producing property.
Thanks,
The BMT Team
Hi
If you receive a property as part of a deceased estate and have rented it as an investment property is cgt based on the value of the property when it was transferred to my name and the sale price or is it the value the deceased person purchased it for and the sale price?
Hi Jacinta,
Thanks for your comment.
Your accountant will look at several things when determining the cost base of your investment property.
We recommend getting in touch with them prior to the sale to discuss this with you.
Thanks,
The BMT Team
Hello,
My parents have three investment properties and have been told by their property manager that if they sell one, that they will have to pay CGT on the aggregate of their investment properties. That does not seem logical. Are you able to assist?
Thank you.
Ilona
Hi Ilona,
Thanks for your comment.
We recommend getting in touch with your accountant as they will be able to advise on anything CGT-related. But CGT is generally applied solely to the income-producing property that is sold.
Also it’s important to note your parents will be eligible for a 50 per cent CGT discount on their property if they have owned it for more than 12 months.
Thanks,
The BMT Team
My husband has an investment property that he purchased early 2000,s for his mum and the our daughter….being a novice he didn’t mention to the ATO Now we want to sell it but not pay CGT for obvious reasons how do we do this..
Hi Wilma,
Thanks for your comment.
We recommend to discuss your situation with your accountant. If the property was used to produce income and the property is then sold at a profit, then CGT must be applied.
Given that your husband has held the property for more than 12 months, you could be eligible for a 50 per cent discount on any CGT liability.
Thanks,
The BMT Team
Hi.
Is capital gains taxed calculated from your purchase price or its value when it became an investment?
E.g
In 2017 i purchased a property for $450,000 after 3 years of living in the property i purchased a new home and moved out. At the time of moving out the house was valued at $550,000.
I know rent the property out and have so for 2 years. If i sell next year at a sale price of $700,000
Will i pay a gain from the purchased price or the value from when it was rented?
Thanks
Hi Kevin,
Thanks for your comment.
It would be best to discuss this with your accountant as they are the experts in calculating capital gains tax. Many different events can change what is payable and you may be eligible for the 6-year rule – but your accountant will be able to provide further guidance.
Thanks,
The BMT Team
Hi There,
I bought a piece of land 2years ago to build an investment property. We entered into building contract 1 and a half years ago and build was competed with handover 11 months ago. We have only managed to rent the property for 2 months and due to covid have had to sell. Contract of sale is less than a year from the occupancy certificate but as we purchased land and entered into building contract over a year ago are we able to claim the 50 percent rule for CGT? Thanks for your advice.
Hi Jane,
Thanks for your comment.
The ATO states that you can use the discount method if you owned the property for at least 12 months, even if you didn’t construct the new building more than 12 months before the CGT event happened. When you sell a property, the time of the CGT event is when you enter into the contract, not when you settle.
We recommend getting in touch with your accountant to discuss the CGT on your property as they can provide further advice.
Thanks,
The BMT Team
Hi,
I have been told that I need to pay CGT on my investment property even though I want to knock it down and rebuild on it. I want to live in it after the rebuild. Do I have to pay CGT the year I knock down and rebuild? I thought you only pay CGT when you sell a property.
I purchased the property in 2011 and moved in for 8months. The property has been rented out since then.
Thank you,
Thi
Hi Thi,
Thanks for your comment.
CGT is very complex and a number of CGT events’ can occur to to trigger a capital gain or loss.
We recommend discussing this with your accountant as they can provide further advice on CGT.
Thanks,
The BMT Team
Hello
You mention above that the ‘six year rule’ starts again if you live in the house that you previously rented out. How long do you need to live in the house before you can again rent it out and the six year period starts again?
Thanks very much
Rowena
Hi Rowena,
Thanks for your comment.
Determining whether a property is your main residence, and therefore eligible for the ‘six year rule’, is considered on a case-by-case basis.
The ATO covers the topic here. https://www.ato.gov.au/general/capital-gains-tax/your-home-and-other-real-estate/your-main-residence/treating-a-dwelling-as-your-main-residence-after-you-move-out/
If you’re thinking about moving into your investment property prior to selling, we recommend discussing this with your accountant. They will be able to provide more advice on the topic.
Thanks,
Thank you so much! this has been super helpful. Bianca
Can you tell me if CGT is applicable if you sell your property at a loss? Property purchased for 400k in 2017. Selling now in 2020 for 380k. Thank you for your assistance.
Hi Bianca,
Thanks for your comment.
CGT usually only applies if you have made a capital gain from the sale of your investment property.
If you make a capital loss when disposing of an asset, you can use it to offset any capital gain you made in the same financial year.
However, there are a number of different factors that can impact whether CGT applies to a sale. If you need any further information on CGT, we recommend getting in touch with your accountant.
Thanks,
The BMT Team
Hi,
I’m wondering if you could assist me about my property CGT calculation:
The property was jointly purchased by my Ex-husband and I, in April 2003 and it was our PPR until rented out.
The property was rented out from September 2005 to about October 2015. I moved back into the property in December 2015, however
the property was transferred to my name at the end of 2016.
Based on the information I have obtained so far regarding CGT, here is my gatherings:
The first 6 years of the 10 years that the property was rented out, will be exempted from CGT.
The capital gain in the last 4 years will be calculated based on the value of the property between end of 2011 to end of 2015. The difference of the 2 values will be considered as the gain on the property and 50% of that will be subject to tax return in the following financial year.
I would like to obtain your comment and direction on the above?
Thank you
Kind Regards,
Hi Mansy,
Thanks for your comment.
If the property is your main residence and then rented, the CGT exemptions can be impacted when it is transferred or sold. It would be best to discuss this with your accountant. Only accountants are able to provide advice on how CGT is calculated.
Thanks,
The BMT Team
If an investment property is re mortgaged and valued at $40,000 more than it’s purchase price, does capital gains tax need to be paid? Some principal of that mortgage was withdrawn for another house. The investment was not sold, just a change of bank for the mortgage.
Hi Megan,
Thanks for your comment.
A Capital Gains Tax event is usually triggered when the investment is disposed of (sold). It would be best to discuss this with your accountant. Only accountants are able to provide advice on how CGT is applied.
Thanks,
The BMT Team
I am not an Australian resident, am I eligible for a 50 per cent discount on my net capital gain?
I have owned the property for more than 20 years.
Thank you.
Hi Ellen,
Thanks for your comment.
Since you acquired the property before 8 May 2012, you may be eligible for the 50 per cent discount. The Australian Taxation Office provides more information on this here: https://www.ato.gov.au/general/capital-gains-tax/international-issues/cgt-discount-for-foreign-resident-individuals/
We recommend discussing this with your accountant as they will be able to provide further advice on how capital gains tax is calculated.
Thanks,
The BMT Team
Hi Guys
We are moving into our rental property (bought 2014) it has always been an investment but due to covid we have sold our home & moving in h there. Just wondering if we ever sell this property in the future do we need to pay capital gains tax?
Hi Petina,
Thanks for your comment.
If this property is classed as your main residence at the time of sale, it may be eligible for the main residence exemption.
We recommend discussing with your accountant as they can provide advice on how capital gains tax is applied.
Thanks,
The BMT Team
What if the property is owned by a family company but is also the primary place of residence.
Does CGT apply? Also is there a period of time of ownership that a property no longer attracts CGT?
Hi Tony,
We are only qualified to provide information on CGT as directly related to depreciation. We’d recommend asking your accountant or consulting with the Australian Taxation Office.
Thanks,
BMT Team