Complete Guide to Capital Gains Tax on Australian Real Estate

Capital gains tax (CGT) is one of the most significant considerations when selling property in Australia. Understanding how CGT applies to your situation can save you thousands of dollars and help you make informed decisions about your property investments.

What is Capital Gains Tax?

Capital gains tax is a tax on the profit you make when you sell an asset for more than you paid for it. In Australia, CGT applies to properties acquired after September 19, 1985. The tax is not a separate tax but forms part of your income tax and is calculated at your marginal tax rate.

How Capital Gains Tax is Calculated

The basic calculation for capital gains is:

What's Included in the Cost Base?

• Purchase price of the property
• Stamp duty and legal fees on purchase
• Real estate agent's commission on sale
• Legal fees on sale
• Advertising costs for sale
• Capital improvements (not repairs or maintenance)
• Title search and survey fees

Main Residence Exemption

The main residence exemption is the most significant CGT exemption available to Australian property owners. If the property was your main residence for the entire period you owned it, you may be completely exempt from CGT.

Key Requirements for Main Residence Exemption:

• The property must be your main residence
• You can only have one main residence at a time
• The land area must be 2 hectares or less
• You must not have used it to produce income

Partial Main Residence Exemption

If you used your home to produce income (e.g., renting out a room) or it wasn't your main residence for the entire ownership period, you may be eligible for a partial exemption.

CGT Discount for Individuals

If you've owned the property for more than 12 months and you're an individual (not a company), you may be eligible for the 50% CGT discount. This means you only pay tax on half of your capital gain.

Example of CGT Discount:

Six-Year Rule for Former Main Residence

If you move out of your main residence and rent it out, you can continue to treat it as your main residence for CGT purposes for up to six years, provided you don't treat another property as your main residence during this period.

CGT and Investment Properties

Investment properties are generally subject to CGT when sold, but there are strategies to minimize your tax liability:

Timing Your Sale

• Hold the property for more than 12 months to access the CGT discount
• Consider selling in a financial year when your income is lower
• Time the sale to offset against capital losses

Capital Improvements vs. Repairs

Capital improvements can be added to your cost base, but repairs and maintenance cannot. Understanding this distinction is crucial:

CGT Small Business Concessions

If you're running a business from your property or the property is a business asset, you may be eligible for small business CGT concessions, which can provide significant tax savings.

Record Keeping Requirements

Maintaining accurate records is essential for CGT compliance:

• Purchase and sale contracts
• Receipts for all costs included in cost base
• Records of capital improvements
• Depreciation schedules
• Insurance valuations

CGT Strategies to Minimize Tax

1. Use Capital Losses

Capital losses from other investments can be used to offset capital gains, reducing your overall CGT liability.

2. Consider Joint Ownership

If you're married or in a de facto relationship, consider the tax implications of who owns the property, as this can affect the marginal tax rate applied.

3. Installment Sales

Spreading the receipt of sale proceeds over multiple years can help manage your tax liability.

4. Pre-CGT Assets

Properties acquired before September 20, 1985, are generally exempt from CGT, but improvements made after this date may still be subject to CGT.

Common CGT Mistakes to Avoid

• Not keeping adequate records of costs and improvements
• Claiming the main residence exemption incorrectly
• Not understanding the six-year rule
• Failing to consider the timing of the sale
• Not seeking professional advice for complex situations

When to Seek Professional Help

CGT can be complex, and professional advice is recommended when:

• You have multiple properties
• Your situation involves partial exemptions
• You're considering business concessions
• You have significant capital gains or losses
• You're unsure about record keeping requirements