What is capital gains tax on property
Capital gains tax (CGT) is not a separate tax in Australia but rather a component of income tax. When you sell a property for more than you paid for it, the profit (capital gain) is included in your assessable income for that financial year and taxed at your marginal income tax rate.
CGT applies to most assets including property, shares, and business assets. It does not apply to assets purchased before 20 September 1985 (pre-CGT assets). The rules are administered by the Australian Taxation Office (ATO) under the Income Tax Assessment Act 1997.
CGT is federal, not state
Capital gains tax is a federal tax, not a NSW state tax. Stamp duty is a NSW state tax. They are separate obligations. CGT is payable to the ATO through your annual tax return. Stamp duty is payable to Revenue NSW at settlement.
How CGT is calculated on property
The capital gain is calculated as the capital proceeds (sale price) minus the cost base. The cost base includes the original purchase price, stamp duty paid on purchase, legal and conveyancing costs on purchase and sale, agent's commission on sale, and the cost of capital improvements made to the property. It does not include ongoing maintenance costs or interest on the mortgage.
The resulting capital gain is added to your other income for the year and taxed at your marginal rate. For a high-income individual, this can mean CGT is effectively taxed at 45% plus the 2% Medicare levy.
The 50% CGT discount
Australian resident individuals and trusts who have held an asset for more than 12 months before selling are entitled to a 50% CGT discount. This means only half the capital gain is included in assessable income. Companies are not entitled to the discount.
The 50% discount is one of the most significant tax concessions available to property investors in Australia. On a gain of $400,000, a qualifying individual only includes $200,000 in their assessable income rather than the full amount.
Proposed changes to the CGT discount
There have been ongoing policy discussions in Australia about the CGT discount. Various proposals have included reducing the discount from 50% to 25% for property investors. No change has been legislated as of April 2025, but the political environment makes this worth monitoring closely. Download our free eBook for a detailed breakdown of proposed changes and their potential impact.
The main residence exemption
Your main residence (the home you live in) is generally exempt from CGT. The exemption applies to the land and dwelling that is your primary place of residence. You can only have one main residence at a time, with limited exceptions for periods of transition between homes.
The exemption can apply proportionally where a property was your main residence for only part of the ownership period. If you lived in a property for three years, rented it for two years, then sold it, approximately 60% of the gain may be exempt with 40% subject to CGT (subject to the 6-year absence rule).
The six-year absence rule
If you move out of your main residence and rent it, you can treat the property as your main residence for CGT purposes for up to six years after moving out, provided you do not nominate another property as your main residence during that period. This can significantly reduce the CGT liability on properties that were genuinely lived in before being rented out.
Investment properties and CGT
Investment properties do not attract the main residence exemption. All net gains on the sale of investment properties are subject to CGT. The timing of the sale (to coincide with lower income years), the use of the 50% discount, and the treatment of capital improvements in the cost base are the primary planning tools available.
Negative gearing losses accumulated during the ownership period do not directly reduce the CGT liability but do offset ordinary income in the years they are incurred, reducing the overall tax paid during ownership.
Proposed CGT changes and what they could mean
The 50% CGT discount has been subject to ongoing debate in Australian policy circles. Arguments for reducing or removing the discount centre on its role in inflating property prices and favouring asset owners over wage earners. Arguments against change focus on investment incentives, the disproportionate impact on small investors who rely on property for retirement, and the complexity of unwinding expectations formed when the current rules were in place.
There has also been discussion about aligning Australia's CGT treatment more closely with other countries, some of which tax capital gains at the full marginal rate. Any change would likely be prospective (applying to assets purchased after the change date) rather than retrospective, to avoid taxing gains accrued under the old rules.
For a detailed analysis of the proposed changes and practical strategies to consider now, download our free CGT eBook. For specific tax advice about your situation, consult a registered tax agent or financial adviser.