Capital gains tax and selling property

When owning an investment property, there are a few tax-related matters to take note of. There are tax benefits that investors enjoy like depreciation allowances and tax deductions if your property is negatively geared. There is also Capital Gains Tax, or CGT, where your property is subject to tax when you decide to sell it.

Here we’ll offer some more detailed information about capital gains tax if you decide to sell your investment property in the future:

What is capital gains tax?

Usually, you will make a capital gain or a capital loss when you sell an asset like a property or shares. If your asset grew in value from the day you purchased it to the day you’re selling, the capital gain you received from selling the asset will be taxed. This tax is called capital gains tax.

In the matter of selling a property, you are required to pay CGT if the property is not considered as your primary home. Any kind of property you own will be taxed whether it is an investment property, vacant land, or a holiday home.

How to avoid capital gains tax on your property

As you navigate CGT on your investment property, it’s important to understand when you are and are not required to pay it.

Here are some of the main strategies used to avoid paying CGT:

Main residence exemption

If the property you are selling is your principal place of residence, you will not have to pay capital gains tax. However, if you have used the property to generate income through short term rental accomodation, or through running a business on the premises, you may have to pay a portion of the capital gain as tax.

Temporary absence rule

If you move out of your residence for a short period of time, it can still be considered your primary place of residence.

You can continue to treat the property as your main residence for up to six years if you initially buy a property as your main residence and decide to rent it out later on.

Timing capital gain or loss

A strategy used by many investors, is strategically selling an investment property in a financial year they plan on making less money.

For example, if you are soon to retire, or reduce your work to part-time, selling your property during that financial year would mean your income is in a lower tax bracket, thus reducing the CGT you pay.

You can also offset your CGT with capital loss from other investments such as shares or ETF investments.

Partial exemptions

Most investments, including property, will allow a 50% discount on CGT if you hold the investment for more than 12 months.

Usually those with investment properties will wait 12 months to sell their investment to avoid these heftier taxes, even if the value of the property has increased inside of the first year.

Investing in superannuation

A more complex issue to navigate, is if your property is an asset in a self managed super fund (SMSF). They allow a one third discount for CGT. (This discount is only applicable for SMSFs).

CGT does not apply if you owned the asset before CGT started on 20 September 1985

How much is your capital gains tax?

There are a variety of factors that will effect how much CGT you'll pay, including how long you have owned the property, what your marginal tax rate is, and if you have made a capital gain or loss.

Capital gain or capital loss is calculated by subtracting the selling price from the original value of the property when you first bought it and other associated costs like conveyancing fees, stamp duty, valuation report, building inspection and more. The result will be your capital gain or loss.

The length of ownership is relevant because if you have held the property for more than 12 months, you will get a 50% discount on CGT. 

If you have owned the property for less than 12 months, you will pay full CGT on any capital gain you achieved. CGT will then be collected by the Australian Taxation Office (ATO).

It’s still best to get an understanding of your capital gains tax payable from your accountant before you sell your investment property.

Capital loss

If you own more than one investment property, or other investments such as shares, that have decreased in value, you can deduct this from your capital gains (that you’ve made from other sources) to reduce the amount of tax you’ll have to pay.

If you don’t have any capital gains, then you can also carry over any capital losses to other income years.

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