Insights · Property and lending
Capital gains tax for property investors
Selling an investment property usually means a capital gains tax (CGT) bill, and it’s often bigger than people expect because it lands in a single tax year. Understanding how it’s worked out gives you the chance to plan for it.
How the gain is worked out
Capital gain = sale price − selling costs − cost base
Your cost base includes:
- the purchase price,
- stamp duty, legal and conveyancing fees on purchase,
- building and pest inspections and valuations for the purchase,
- capital improvements (renovations, extensions, new kitchens),
- costs of defending your title, and
- some holding costs (interest, rates, insurance) that weren’t deductible, for example while the property was vacant land or your own home.
Selling costs include agent commissions, advertising, and legal fees on the sale.
The 50% discount
If you’ve owned the property for more than 12 months, individuals and trusts can reduce the gain by 50%. Complying super funds, including SMSFs, get a one-third discount. Companies don’t get a discount at all.
How it’s taxed
The discounted gain is added to your taxable income for the year and taxed at your marginal rate. A large gain can push you into the 37% or 45% bracket for that year.
Example: Lee bought a unit for $500,000 plus $25,000 in costs, and spent $30,000 renovating. Lee sells for $820,000, with $20,000 in selling costs.
| Sale price less selling costs | $800,000 |
| Cost base ($500,000 + $25,000 + $30,000) | ($555,000) |
| Capital gain | $245,000 |
| 50% discount | ($122,500) |
| Taxable capital gain | $122,500 |
Added to Lee’s $90,000 salary, that’s taxable income of $212,500 for the year.
Depreciation and the cost base
Capital works deductions (the 2.5% a year on the building) reduce your cost base, so they increase the gain when you sell. Plant and equipment sold with the property is treated separately, with any balancing adjustment in your return. Depreciation still usually leaves you ahead: you get the deduction now, at your full marginal rate, while the extra gain later is discounted by 50%. See depreciation on new and established properties.
Timing
- The contract date counts, not settlement. A contract signed on 25 June is in this year’s return even if settlement is in August.
- Hold for at least 12 months (from contract date to contract date) to get the discount.
- Consider your income: selling in a year your income is lower, such as after retiring or during parental leave, can mean less tax.
Losses
Capital losses can only be offset against capital gains, not your salary. Unused losses carry forward indefinitely. Selling a loss-making investment in the same year as a property sale can reduce the overall gain.
Former homes
If the property was your home for part of the time, you may get a partial main residence exemption, or a full one under the six-year absence rule. See the main residence exemption.
Keep your records
The purchase contract, settlement statements, invoices for every improvement, depreciation schedules, and loan statements. Without them you may not be able to prove your cost base, and you’ll pay tax on a bigger gain than you made.
Plan before you sign
The best time to work out the CGT is before you list the property, not after it sells. We can estimate the tax, look at timing, and set aside the right amount from the proceeds. See personal tax returns.