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?
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
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
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
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
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
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
Thank you so much! this has been super helpful. Bianca
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,
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
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