How Capital Gains Tax (CGT) Is Triggered and Calculated
When you sell an investment property that is not your main residence, you generally make a capital gain or loss. That gain becomes part of your assessable income for the year and is taxed at your marginal income tax rate. You only report a capital gain in the income year the contract is signed, not at settlement.
A capital gain (or loss) is usually the difference between what you received for the asset (the capital proceeds) and what you paid for it (the cost base). The cost base isn’t just the purchase price — it can include certain ownership costs like stamp duty, legal fees, and some improvement costs, as well as selling costs like agent commissions.
If you’ve held the property for more than 12 months, you may qualify for the 50% CGT discount for individuals, meaning only half the gain is taxed.
The 50% CGT Discount and When It Applies
If you’re an Australian resident individual and you’ve owned the property for at least 12 months before the sale contract date, you may reduce the capital gain by 50% before including it in your assessable income. The holding period counts from acquisition to the contract date, not settlement. You must be an Australian resident at the time of the CGT event to claim the discount, though exceptions can apply where a foreign resident ceases to be a foreign resident and chooses to be treated as an Australian resident for CGT purposes.
A capital gain that results from a dwelling that was your main residence for part of the ownership period may be partially exempt, and the discount may apply to any remaining gain that is not exempt.
Main Residence Exemption and Its Impact on Investment Properties
Your main residence is generally exempt from CGT. But if the property was used to produce income — for example, if it was rented out — you may not receive the full exemption. A common scenario is when you move out and rent the property: you can treat it as your main residence for up to six years after moving out, provided it isn’t used to produce income from another main residence in that time. If you move back in and then move out again, a new six-year period can begin.
Where the main residence exemption only applies for part of the ownership period, CGT is calculated on the proportion of the gain attributable to the non-exempt period. For example, if you owned a property for 10 years and it was your main residence for 2 years but rented for 8, only 80% of the gain is taxable, reflecting the 8 non-exempt years.
How Partial Sales and Subdivision Are Treated
If you sell only part of an investment property (for example, subdividing and selling a vacant block), the cost base of the original property must be apportioned between the part sold and the part retained. The apportionment can be based on area or market value at the time of acquisition. The capital gain is calculated separately for the part sold, and you may still qualify for the CGT discount on that portion if the ownership period exceeded 12 months.
Reporting the Gain and Using Capital Losses
If you have a net capital gain after applying all applicable discounts and exemptions, that amount is added to your assessable income and taxed at your marginal rate. If you made a capital loss on another asset, you must first offset that loss against the gain before applying the CGT discount. A capital loss can only be offset against a capital gain; it cannot reduce assessable income from other sources.
Capital gains and losses are reported in your tax return for the income year in which the contract is signed, not the year of settlement.