Capital gains tax on property in Australia explained simply

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BAMBOOROUTES

A team specialized in real estate investing in APAC countries (Japan, Thailand, Indonesia, Australia, etc.).

We are a team of financial experts, legal professionals, developers, and local real estate specialists dedicated to helping people like you avoid mistakes when investing in real estate in a foreign place, particularly in Australia. If you'd like to learn more about us, you can check our presentation page.

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At BambooRoutes, we explore the Australian real estate market every day. Our team doesn't just analyze data from a distance—we're actively engaging with local realtors, investors, and property managers in cities like Sydney, Melbourne, and Brisbane. This hands-on approach allows us to gain a deep understanding of the market from the inside out.

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What exactly is capital gains tax in Australia and how does it apply when you sell a property?

Capital gains tax in Australia is a tax on the profit you make when selling a property for more than you paid for it.

CGT is not a separate tax system but forms part of your regular income tax. The Australian Taxation Office adds your capital gain to your other income for the year, and you pay tax on the total at your marginal tax rate. This means if you're in the 32.5% tax bracket and make a $100,000 capital gain, you'll pay $32,500 in tax on that gain (before any discounts or exemptions).

The tax applies to all types of property including houses, apartments, vacant land, and commercial real estate. However, your main residence where you live is generally exempt from CGT, while investment properties and holiday homes typically face the full tax liability. As of September 2025, the marginal tax rates range from 19% to 47% including the Medicare levy.

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When do you actually become liable for capital gains tax — is it when you sign the contract or when settlement happens?

You become liable for capital gains tax the moment you sign the sale contract, not when settlement occurs.

This timing rule is crucial because it determines which tax year your capital gain falls into. If you sign a contract in June 2025 but settlement doesn't happen until August 2025, your capital gain is assessable for the 2024-25 financial year. This can affect your tax planning, especially if you're trying to manage your income across different tax years.

The Australian Taxation Office refers to this as the "CGT event," and it's legally binding regardless of how long the settlement period takes. Even if settlement is delayed by months due to financing issues or other complications, your tax liability begins from the contract date. This rule applies to all property types, whether it's your main residence, investment property, or vacant land.

How do you calculate your capital gain, and what costs and expenses can you deduct from the sale price?

Your capital gain equals your capital proceeds minus your cost base, where capital proceeds are your sale price minus selling costs.

The cost base includes your original purchase price plus all the costs you incurred buying, owning, and improving the property. You can deduct stamp duty, legal fees, building and pest inspection costs, loan establishment fees, and real estate agent commissions when selling. Capital improvements like renovations, extensions, or swimming pools are deductible, but regular maintenance and repairs are not.

For example, if you bought a property for $500,000, paid $25,000 in stamp duty and legal fees, spent $50,000 on renovations, and then sold it for $700,000 with $20,000 in selling costs, your calculation would be: Capital gain = ($700,000 - $20,000) - ($500,000 + $25,000 + $50,000) = $105,000. Keep detailed records of all these expenses because the ATO may request proof during an audit.

Deductible Costs	Examples	Not Deductible
Purchase Costs	Stamp duty, legal fees, building inspections	Property viewing travel costs
Capital Improvements	Renovations, extensions, pool installation	Regular maintenance, painting, repairs
Selling Costs	Agent commission, advertising, legal fees	Mortgage discharge fees
Professional Costs	Valuations, surveying fees	Tax advice (claimed separately)
Interest and Holding Costs	Interest on loans for improvements	General mortgage interest
Ownership Transfer Costs	Title transfer fees, mortgagee costs	Insurance premiums
Construction Costs	Building costs for new properties	Landscaping and garden maintenance

What is the current capital gains tax rate in Australia and how does it depend on your income tax bracket?

As of September 2025, capital gains tax rates in Australia range from 19% to 47% depending on your total taxable income for the year.

Your capital gain is added to your other income and taxed at your marginal rate. The tax brackets are: 19% for income up to $18,200, 32.5% for $18,201-$45,000, 37% for $45,001-$120,000, and 45% for income above $120,000. The Medicare levy adds an additional 2% across all brackets, bringing the effective rates to 19%, 34.5%, 39%, and 47% respectively.

This means if you're a high-income earner and make a large capital gain, you could pay nearly half of your profit in tax. However, the 50% CGT discount (explained below) can significantly reduce this burden for properties held longer than 12 months. For instance, a $100,000 capital gain for someone in the top tax bracket would normally incur $47,000 in tax, but with the 50% discount, only $50,000 is taxable, resulting in $23,500 in tax.

How does the 12-month ownership rule work and what is the 50% capital gains tax discount in practice?

The 50% capital gains tax discount reduces your taxable capital gain by half if you've owned the property for more than 12 months and are an Australian resident for tax purposes.

The 12-month period is calculated from the day after you acquired the property to the day before you dispose of it. So if you bought on January 15, 2024, you'd need to hold until at least January 16, 2025, to qualify. This discount can dramatically reduce your tax liability—a $200,000 capital gain becomes only $100,000 of taxable income with the discount applied.

The discount only applies to individuals, trusts, and superannuation funds, not companies. For investment properties, this discount makes a substantial difference to your returns. A property investor in the 37% tax bracket making a $150,000 gain would pay $55,500 in tax without the discount, but only $27,750 with the 50% discount applied. This is why many property investors aim to hold assets for at least 12 months and one day.

If you sell your main residence, when does the main residence exemption apply and when do you have to pay CGT anyway?

Your main residence is completely exempt from capital gains tax if you and your family lived in it as your primary home for the entire ownership period and never used it to generate income.

The exemption breaks down when you use part of the home for business purposes or rent out rooms or the entire property. If you run a business from 20% of your home, then 20% of any capital gain becomes taxable. Similarly, if you rent out your home for two years out of a total five-year ownership period, 40% of the capital gain may be subject to CGT.

The exemption also has specific rules about land size—it only covers up to two hectares around your home unless you can demonstrate the entire area was necessary for the reasonable enjoyment of your residence. Holiday homes, weekenders, and investment properties don't qualify for this exemption even if you occasionally stay there. The ATO scrutinizes main residence claims carefully, so you need clear evidence of where you actually lived.

What happens if you rent out your home for part of the time — how does that affect your capital gains tax calculation?

When you rent out your main residence for part of the ownership period, you lose the CGT exemption proportionally based on the time it was income-producing.

Australia's "6-year rule" provides significant relief here. If you move out of your main residence and rent it out, you can still claim the main residence exemption for up to six years, provided you don't treat another property as your main residence during this period. This rule helps people who relocate temporarily for work or personal reasons without losing their tax benefits.

The calculation works on a time basis. If you owned a property for 10 years, lived in it for 7 years, and rented it out for 3 years, then 30% of your capital gain would be taxable (assuming the rental period exceeds the 6-year rule protection). You can also elect to treat your former home as your main residence for up to four years if you don't earn income from it during that period.

How are investment properties treated differently from your primary residence for CGT purposes?

Investment properties face full capital gains tax liability with no main residence exemption, but they qualify for the 50% CGT discount and extensive cost base deductions.

Unlike your main residence, investment properties allow you to claim all ownership costs including loan interest, property management fees, council rates, insurance, and depreciation against your taxable income during ownership. When you sell, these ongoing expenses don't form part of your cost base, but capital improvements and acquisition costs do. The trade-off is that you must pay CGT on any gain.

Investment property owners can offset capital gains with capital losses from other investments, including shares or other properties sold at a loss. This flexibility in tax planning, combined with the 50% discount for long-term holdings, makes investment properties attractive despite the CGT liability. However, you must maintain detailed records of all expenses and improvements to maximize your deductions and minimize your tax burden.

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What specific record-keeping should you maintain from purchase to sale to make sure your CGT calculation is correct?

You must keep comprehensive records for at least five years after disposing of a property to prove your CGT calculations to the Australian Taxation Office.

Essential documents include your original purchase contract, settlement statements, stamp duty receipts, legal fees, loan documents, and valuation reports. For improvements, maintain invoices, receipts, and permits for renovations, extensions, or major upgrades. If you've rented out the property, keep rental agreements, property management statements, and records showing periods of occupancy versus vacancy.

Create a property file from day one containing purchase documents, improvement receipts organized by year, sale-related expenses, and a timeline showing personal use versus rental periods. Many investors use spreadsheets or property management software to track expenses and calculate depreciation. The ATO can request these records during audits, and missing documentation could result in disallowed deductions or penalties.

1. Purchase contract and settlement statement2. Stamp duty and government charges receipts3. Legal fees and conveyancing costs4. Building and pest inspection reports5. Loan establishment and discharge fees6. Capital improvement invoices and permits7. Rental income and expense records8. Valuation reports and market appraisals9. Sale contract and agent commission receipts10. Insurance claims and settlement documents

How does capital gains tax apply if you inherited a property or received one as a gift in Australia?

Inherited properties generally allow you to "roll over" the deceased person's ownership period for CGT discount purposes, while gifted properties are treated as if you purchased them at market value.

When you inherit property, your cost base usually equals the market value at the date of death, but you can count the deceased's ownership period toward the 12-month rule for the CGT discount. This means if your parent owned a property for 10 years and left it to you, you could sell it immediately and still qualify for the 50% CGT discount. However, if the deceased acquired the property before September 20, 1985, it may be exempt from CGT entirely.

Gifts work differently—the market value at the time of the gift becomes your cost base, and your ownership period starts fresh from the gift date. The person giving the gift may also face CGT liability based on the difference between their original cost base and the market value when they gave it to you. Both inherited and gifted properties require professional valuations to establish the correct cost base for future CGT calculations.

What are the rules for foreign residents selling property in Australia and how does the withholding tax work?

Foreign residents face a 12.5% withholding tax on property sales over $750,000, which buyers must remit directly to the ATO on behalf of the seller.

Non-residents don't qualify for the 50% CGT discount and pay higher tax rates on their capital gains. They also miss out on the tax-free threshold that Australian residents enjoy. The withholding tax acts as a prepayment toward the seller's final CGT bill—if their actual CGT liability is less than the withheld amount, they can claim a refund through their tax return.

Foreign residents must lodge an Australian tax return in the year they sell property, even if they have no other Australian income. The withholding rate increases to 12.5% for sales above $750,000, and buyers who fail to withhold face penalties from the ATO. For sales under $750,000, buyers can obtain clearance certificates from the ATO to avoid withholding, but this requires proving the seller's residency status.

Residency Status	CGT Discount Available	Withholding Tax Rate
Australian Resident	50% (if held >12 months)	None
Foreign Resident	No discount	12.5% (sales >$750,000)
Temporary Resident	50% (if held >12 months)	None (if valid visa)
Recent Emigrant	Depends on residency test	May apply if non-resident
Working Holiday Maker	Generally no discount	12.5% (sales >$750,000)

What practical strategies can you use to reduce or defer your capital gains tax liability legally in Australia?

The most effective strategy is holding properties for more than 12 months to access the 50% CGT discount, which can halve your tax liability.

Timing your sales strategically can help manage your tax bracket. Selling in a lower-income year, perhaps when you're between jobs or in retirement, can significantly reduce your marginal tax rate. You can also offset capital gains with capital losses from other investments—selling underperforming shares or properties at a loss in the same financial year can reduce your overall CGT liability.

Consider maximizing your cost base by including all eligible expenses like legal fees, valuations, and capital improvements. Some investors renovate properties before selling to increase both the sale price and the deductible cost base. For couples, transferring property ownership to the partner in a lower tax bracket before selling can reduce the overall tax burden, though this requires careful planning and professional advice.

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1. Hold properties for more than 12 months to qualify for the 50% CGT discount2. Time sales to coincide with lower-income years to reduce marginal tax rates3. Offset capital gains with capital losses from other investments in the same year4. Maximize your cost base by including all eligible purchase and improvement costs5. Consider transferring ownership to lower-income spouse before selling6. Use main residence exemption and 6-year rule strategically for former homes7. Spread large capital gains across multiple years through installment sales8. Invest capital gains into superannuation to benefit from concessional tax rates

Conclusion

This article is for informational purposes only and should not be considered financial advice. Readers are advised to consult with a qualified professional before making any investment decisions. We do not assume any liability for actions taken based on the information provided.

Sources

1. BrightTax - Capital Gains Tax Australia Guide
2. Amplify11 - Capital Gains Tax Australia Guide 2025
3. Liston Newton - Understanding the 6-Year Exemption Rule
4. Australian Taxation Office - CGT Discount
5. Point On Partners - CGT Liability and Settlement
6. Australian Taxation Office - How to Calculate CGT
7. Titan Wealth International - CGT for Australian Expats
8. Property Tax Specialists - Ultimate CGT Guide
9. Westcourt - 50% Capital Gains Tax Discount Guide
10. Australian Taxation Office - Main Residence Exemption