Selling an investment property can create a substantial capital gain — and a substantial tax bill if you have not planned for it.
The good news is that Australian tax law provides several rules that can reduce or defer the amount of capital gain that ultimately becomes taxable. The most important include the 50% CGT discount, main residence exemption, 6-year rule, capital losses and correct calculation of your cost base.
The catch? The rules depend heavily on how you owned the property, how you used it, how long you held it and whether your tax residency changed.
This guide explains the key rules investors need to understand before selling an Australian investment property.
This article reflects the Australian tax rules checked as at August 2026. It is general information only and does not replace advice about your individual circumstances.
What Is Capital Gains Tax on an Investment Property?
Australia does not have a separate flat “capital gains tax rate”.
Instead, your net capital gain is generally included in your taxable income for the year and taxed at your applicable marginal tax rates.
For most property sales, the CGT event occurs when you enter into the contract to sell, rather than when settlement takes place. The capital gain is generally reported in the income year in which that contract is made.
That distinction matters.
For example, if you sign a sale contract on 28 June but settlement occurs on 20 July, the CGT event generally belongs to the earlier income year.
How Do You Calculate the Capital Gain?
The basic calculation is:
Capital proceeds − cost base = capital gain
Your capital proceeds will usually be the sale price, adjusted for relevant amounts.
Your cost base can include much more than what you originally paid. Depending on the circumstances, it can include:
- purchase price
- stamp duty and certain legal and acquisition costs
- eligible capital improvements
- certain ownership costs
- selling and disposal costs.
The aim is to make sure you do not pay CGT on costs that legitimately form part of the property’s cost base.
Keep your settlement statement, purchase documents, invoices for improvements, legal bills, agent’s fees and relevant valuation reports.
The ATO requires records supporting the calculation of capital gains and losses to generally be kept for at least five years after the relevant CGT event, with longer retention potentially required where losses or later tax returns rely on those records.
The 50% CGT Discount
If you are an individual and hold an investment property for at least 12 months before the CGT event, you can generally reduce a qualifying capital gain by 50%.
Trusts can also potentially access the 50% discount, while companies generally cannot access the general CGT discount.
The important date is the CGT event date — normally the contract date for the sale — not the settlement date.
A simple example
Suppose you have:
- Capital gain: $300,000
- Capital losses: $50,000
Your remaining capital gain is:
$300,000 − $50,000 = $250,000
If you qualify for the 50% discount:
$250,000 × 50% = $125,000
The $125,000 net capital gain is then included in your taxable income and taxed at your applicable marginal rates.
Capital losses are applied before the CGT discount.
What Is the Main Residence Exemption?
Your main residence is generally exempt from CGT if it has genuinely been your home and the relevant conditions are satisfied.
If a property has been your main residence for the entire relevant ownership period and has not been used in a way that limits the exemption, you may be entitled to a full exemption.
But things become more complicated when you:
- rent the property out
- use part of it to produce income
- move out and purchase another home
- become a foreign resident
- own multiple properties.
This is why “I lived there once, so it’s automatically CGT-free” is not a safe assumption.
The CGT 6-Year Rule
The 6-year rule is particularly important for people who move out of their home and turn it into a rental.
Where a former main residence is used to produce income, you can generally choose to continue treating it as your main residence for CGT purposes for up to six years during an absence, provided the relevant conditions are met.
You do not necessarily have to move back into the property before selling it.
There is also an important point many investors miss: the six-year period applies separately to each period of absence where you move back into the property and later leave again.
Example
You live in a Perth property for five years, move interstate and rent it out for four years, then sell it.
If the conditions are satisfied and you choose to apply the 6-year rule, the property may continue to receive main residence treatment during that four-year rental period.
But if you rent it out for more than six years during one continuous absence, the exemption does not simply continue indefinitely.
The calculation for the period beyond the six-year limit can involve the market value of the property when it was first used to produce income and a time-based apportionment.
What Happens When Your Home Becomes an Investment Property?
This is one of the most important rules to understand before renting out a former home.
In certain circumstances, when a property that was your main residence is first used to produce income, special CGT rules can apply to determine its tax cost.
If the property falls outside the 6-year rule and becomes partly taxable, the calculation may use the property’s market value when it was first used to produce income rather than simply using the original purchase price.
That means getting a proper valuation at the time you first rent out a former home can be extremely important.
The ATO’s current guidance specifically deals with this “home first used to produce income” rule.
What If You Buy Another Home?
You generally cannot treat two properties as your main residence at the same time indefinitely.
However, when moving from one home to another, the tax rules can allow an overlap of up to six months in certain circumstances.
The choice of which property is treated as your main residence can materially affect the final CGT calculation, especially where one property has appreciated significantly more than the other.
This is a situation where getting advice before selling — rather than after — can make a meaningful difference.
What If You Become a Foreign Resident?
Property investors who leave Australia should pay particular attention to CGT.
If you are a foreign resident when a CGT event happens to Australian residential property, you generally cannot access the main residence exemption in the same way an Australian resident can. There are limited exceptions, but they are narrow.
Foreign residency can also affect the availability of the CGT discount.
For individuals who have periods of foreign residency after 8 May 2012, the full 50% discount may not be available for certain CGT events. The calculation can depend on when the property was acquired and the periods of residency.
And there is another practical issue when selling Australian property.
Foreign Resident Capital Gains Withholding
For relevant property transactions from 1 January 2025, the foreign resident capital gains withholding rate increased from 12.5% to 15%, and the old property-value threshold was removed.
Australian residents selling relevant property generally need an ATO clearance certificate to avoid the purchaser withholding this amount.
Importantly, withholding is not necessarily the final amount of tax you owe. It is a collection mechanism that is reconciled through the relevant tax return.
What About Depreciation When You Sell?
Investment property owners often claim depreciation and capital works deductions during the years they own the property.
When you eventually sell, those deductions can affect your CGT calculation.
In particular, capital works deductions claimed or claimable can reduce the property’s cost base, which can increase the capital gain on disposal.
This is one reason your accountant needs more than just the original purchase contract when calculating CGT.
A depreciation schedule can contain information that becomes relevant years later when the property is sold.
We help investors work through Division 43 capital works, Division 40 depreciation and the CGT treatment of the property on disposal through our property tax accounting service.
What About Capital Losses?
Capital losses can reduce capital gains.
For example, suppose you have:
- Property capital gain: $250,000
- Share investment capital loss: $40,000
Your capital gain after applying the loss becomes $210,000
If you are eligible for the 50% discount, that discounted amount is then calculated after applying the capital loss.
Capital losses generally cannot be used to reduce ordinary income such as your salary or rental income. Instead, unused capital losses can generally be carried forward to offset future capital gains.
Can the Timing of Your Sale Reduce Tax?
Potentially.
Because the net capital gain becomes part of your taxable income, the other income you receive during the same financial year can affect the amount of tax ultimately payable.
For example, selling an investment property in a year when you also receive:
- a large employment bonus
- substantial business income
- significant investment income
could produce a different tax outcome from selling in a year where your other taxable income is lower.
However, the key date for CGT purposes is generally the contract date, not the settlement date.
That means timing discussions need to happen before signing the sale contract.
This is one reason our tax planning service looks at CGT timing as part of broader year-round tax planning rather than waiting until the return is due.
What About Superannuation Contributions?
An eligible deductible personal super contribution can potentially reduce taxable income in the year it is claimed.
That can affect the overall tax payable where a large capital gain is realised in the same year.
However, super contributions have their own eligibility rules, contribution limits and documentation requirements. A contribution does not directly “cancel out” a capital gain.
The important question is whether the contribution is legally deductible and whether making it produces a worthwhile overall tax outcome.
What About Holding the Property in a Trust?
A trust can potentially access the 50% CGT discount where the relevant requirements are met, and certain trusts can provide flexibility in how income and capital gains are distributed.
But this is not as simple as “put the property in a trust and distribute the gain to whoever pays the least tax.”
The trust deed, beneficiaries, distribution resolutions and specific capital gains rules all matter.
More importantly, transferring an investment property you already own into a trust can itself trigger CGT and transfer-duty consequences.
In most cases, ownership structure is a decision to think about before purchasing the property, not after a large capital gain has built up.
Worked Example: How CGT on an Investment Property Can Add Up
Imagine you bought a Perth investment property for $600,000.
Over the ownership period you incur:
- $25,000 of eligible acquisition costs
- $75,000 of eligible capital improvements
- $20,000 of eligible selling costs.
You later sell the property for $1,050,000. Your simplified calculation would begin with:
Capital proceeds: $1,050,000
Less cost base and relevant costs: $720,000
Capital gain: $330,000
Now assume you have $30,000 of capital losses from other investments:
$330,000 − $30,000 = $300,000
If you are eligible for the 50% discount:
$300,000 × 50% = $150,000
The resulting $150,000 net capital gain is added to your other taxable income.
This is a simplified example. Actual calculations can change because of depreciation, capital works deductions, ownership structure, GST considerations, the main residence rules and other adjustments.
The Most Common Investment Property CGT Mistakes
- Waiting until settlement to think about CGT: By then, the contract has already been signed.
- Using the wrong contract date: The CGT event generally happens when the sale contract is entered into, not at settlement.
- Losing records for renovations: A kitchen renovation or structural improvement can potentially affect your cost base — but only if you can substantiate the relevant costs.
- Ignoring capital works deductions: Claiming deductions during ownership can affect the cost base later.
- Assuming the 6-year rule always means “zero CGT”: It has conditions, and the outcome can change if the property is rented beyond the relevant period or if other properties are involved.
- Forgetting foreign residency: Moving overseas can materially change the CGT and main-residence outcome.
- Transferring an existing property without tax advice: Changing ownership to a trust or another entity can create a CGT event and duty liability.
Keep Your Property CGT Records
Keep the documents you may eventually need to calculate the gain, including:
- purchase contract and settlement statement
- stamp duty records
- legal and conveyancing invoices
- renovation and improvement invoices
- valuation reports
- depreciation schedules
- agent and advertising costs
- sale contract and settlement statement
- records relating to periods the property was your main residence
- evidence supporting changes in use.
Do not throw away old renovation invoices simply because the work happened years ago.
The ATO’s record-keeping guidance states that records affecting capital gains and losses generally need to be retained for at least five years after the relevant CGT event, with longer periods potentially required where carried-forward losses or later returns rely on them.
Want to Estimate Your CGT Before You Sell?
A quick estimate can help you understand the size of the potential liability, but CGT calculations become complicated once you introduce a former home, depreciation, capital losses, trusts or a change in tax residency.
Our capital gains tax calculator can help you get an initial estimate, while the investment property calculator can help you assess the property’s broader cash-flow and tax position.
For investors with more complex circumstances, the better approach is to model the sale before signing the contract.
Plan Your Property Sale Before You Sign
Capital Gains Tax is much easier to manage when you know the rules before the sale is locked in.
The biggest opportunities often come from decisions around:
- the timing of the contract
- the main residence exemption
- the 6-year rule
- capital losses
- the property’s cost base
- depreciation and capital works
- ownership structure
- Australian tax residency
- other taxable income in the year of sale.
KSH TAX works with Perth property investors on rental property tax, depreciation, ownership structures and CGT planning.
See our property tax accounting service to see how we can help, or use our tax planning service to plan the transaction before you sign.
Thinking about selling an investment property? Call us on 08 6285 8110 or book a consultation before you sign the contract.
