If you’re planning to sell your investment property, understanding how Capital Gains Tax (CGT) works is essential. CGT applies to the profit made when selling a property. You pay CGT on the sale of an investment property - a property that has been rented out or used to generate rental income - and even properties that were once your main residence may still be partially subject to CGT depending on their use over time.

Calculating CGT starts with determining the difference between your property’s sale price and its cost base, which includes the purchase price, capital improvements, and eligible deductions like depreciation and capital works. These deductions reduce your taxable capital gain, which becomes part of your taxable income, determining the amount of tax you owe. Planning ahead and understanding these rules can significantly lower how much you pay in Capital Gains Tax.

Schedule a complimentary consultation today and let us guide you through the process to optimise your returns.

Key exemptions and discounts to minimise Capital Gains Tax on investment property

Reducing your Capital Gains Tax liability is possible with proper planning and by using things like exemptions and tax deductions.

Here are key strategies to help you lower the amount you pay when selling your investment property:

Understand the timing of your sale

If you’ve owned your investment property for more than a year as calculated from the contract date not the settlement date, you may qualify for the 50% Capital Gains Tax (CGT) discount. This significantly reduces your taxable capital gain and your overall Capital Gains Tax (CGT) liability. Carefully timing your sale to align with this threshold can make a big difference in the tax you pay.

Natural persons and trusts are eligible for the 50% discount. SMSFs get a 33% discount, however companies which own CGT assets such as land and buildings do not qualify for the CGT discount.

Use the main residence exemption

Properties that were once your main residence may qualify for partial or full exemptions from Capital Gains Tax (CGT). This can apply if you previously lived in the property before renting it out within a six year period. Read our article How the "6-Year Rule" can reduce your Capital Gains Tax (CGT) to learn more. The Australian Taxation Office recognises this exemption, making it a valuable way to avoid Capital Gains Tax on properties with dual purposes.

Leverage the six-year absence rule

If you rented out your former primary residence, you could claim a Capital Gains Tax exemption for up to six years after moving out. Selling the property within this timeframe allows you to offset or eliminate CGT. This rule helps reduce tax liability on rental income properties used for temporary investment purposes. To learn more about how the six year rule works, read our article How the "6-Year Rule" can reduce your Capital Gains Tax (CGT).

Maximise your cost base

To minimise your taxable capital gain, include all allowable expenses in your property’s cost base. Items like legal fees, stamp duty, renovation costs, and sale costs lower the total net capital gain. Properly calculating these figures ensures you don’t overpay on your Capital Gains Tax property obligations.

How to maximise your property’s cost base

Reducing your taxable capital gain starts with understanding the expenses, including investment property tax, that you can add to your property's cost base. These additions can significantly lower your CGT liability when selling your investment property. Below are key costs that may qualify and how they can help you optimise deductions.

Expenses that can be added to your property’s cost base

Improvements

Major renovations, such as kitchen upgrades, extensions, or structural modifications, that enhance the property’s value or lifespan.

Legal fees

Costs incurred during the purchase or sale of the property, like conveyancing fees, necessary for completing ownership transfers.

Advertising costs

Expenses for marketing or promoting the property for sale, including campaigns and promotional materials.

Agent’s commissions

Fees paid to real estate agents for acquiring or selling the property.

Stamp duty

The tax paid when transferring ownership, which is a significant cost to include.

Repairs and maintenance

While routine maintenance is excluded, substantial improvements or major repairs that increase the property’s value can qualify.

Why consider a capital gains reduction report?

A capital gains reduction report (quantity surveyor's report) offers a detailed analysis of all eligible costs to ensure you’re maximising deductions and minimising your taxable capital gain.

It includes:

Comprehensive inventory of costs

Identifies all allowable expenses to ensure none are overlooked.

Tax planning insights

Provides clarity on cost base adjustments to help time your property sale for the greatest tax efficiency.

Documentation for compliance

Ensures your claims meet Australian Taxation Office requirements, protecting you in case of audits or inquiries.

Which CGT strategy works best for your investment property?

Selecting the right Capital Gains Tax (CGT) strategy depends on your circumstances and goals.

Here are three key options to consider, along with their advantages and limitations, to help you make an informed decision:

1. Main residence exemption

• Advantages: Completely avoids Capital Gains Tax for a property that was your primary residence. This is especially beneficial if you lived in the property before renting it out.
• Limitations: You can only apply this exemption to one property at a time, and you must prove it was genuinely your main residence with supporting documents like utility bills or address records.

2. Six-year rule

• Advantages: Allows a former main residence to remain exempt from CGT for up to six years while generating rental income. Ideal for temporary relocations or short-term property investments.
• Limitations: If you designate another property as your main residence during this time, the exemption for the rented property no longer applies.

3. 50% CGT discount

• Advantages: Provides a 50% reduction on the taxable capital gain if the property is held for more than 12 months, making it accessible to most investors.
• Limitations: The remaining 50% of the gain is still taxable and subject to your marginal tax rate, leaving you with a CGT liability.

How to calculate your CGT

Understanding your CGT begins with a simple process.

Follow these steps to efficiently calculate Capital Gains Tax and determine your liability:

1. Determine your capital proceeds

Calculate the amount received from selling the asset or compensation for a CGT event, such as an insurance payout if the asset was destroyed. If the property was sold below market value or given away, use the market value as your capital proceeds.

2. Calculate your cost base

Include the purchase price, capital expenses, and other costs like legal fees, stamp duty, and maintenance costs associated with acquiring, holding, and selling the property. For assets purchased before 21 September 1999, you can index the cost base for inflation instead of applying a CGT discount.

3. Subtract the cost base from the capital proceeds

A positive result indicates a capital gainm while a negative result means you’ve incurred a capital loss.

4. Repeat for each asset

Perform these calculations for all CGT events in the financial year to determine your total capital gains or capital losses.

5. Offset capital losses against capital gains

Deduct any capital losses from your capital gains. Apply carried-forward losses first, prioritising gains that don’t qualify for a CGT discount to reduce your taxable gains and maximise your net capital gains.

6. Apply CGT discounts

If the asset was held for more than 12 months, you may qualify for a 50% CGT discount (for individuals and trusts) or other rates for specific entities like self-managed super funds. Note that indexed assets cannot also use the discount.

7. Report in your tax return

Record your net capital gain or loss in your income tax return. Net gains are taxed at your marginal tax rate, while capital losses can be carried forward to offset future capital gains.

Using tools like the Australian Tax Office CGT calculator available through myGov can help you simplify this process and ensure compliance with the Australian Taxation Office’s requirements.