Selling an Investment Property: How Capital Gains Tax Works

Selling an investment property triggers a capital gains tax calculation built from a handful of moving parts: the cost base, how long you owned it, the 50% discount, and which financial year the sale falls into. Each one is easy to get slightly wrong.

Building the Cost Base

The cost base is what you subtract from the sale price to arrive at your capital gain. It is built from five elements:

• What you paid for the property.
• Incidental costs of buying and selling it: stamp duty, legal fees, the agent's commission on sale, and loan application or valuation fees.
• The costs of owning it, such as rates and non-deductible interest, but only where not otherwise tax deductible.
• Capital improvements made during the holding period.
• Capital costs of defending your title to the property.

The third element rarely does much work for a rental property: rates, insurance, repairs and loan interest are usually already claimed as deductions against rental income each year, and you cannot add a cost to the cost base once you have claimed it as a deduction.

The distinction that most often trips people up is capital improvements versus repairs. Adding a deck or replacing a kitchen adds to the cost base; fixing a tap or patching a fence is deductible in the year you pay for it. Capital works and depreciation already claimed over the years reduce the cost base rather than sitting inside it, clawing back part of the deduction at sale.

The 12-Month Rule and the 50% Discount

Individuals and trusts that have owned a property for at least 12 months before the CGT event can reduce the capital gain by 50% before it is added to assessable income, provided they are an Australian resident for tax purposes. The 12-month count excludes both the day you acquired the property and the day of the CGT event itself.

Complying super funds get a 33.33% discount instead, and companies get none, a difference worth knowing when weighing up how a property is held. Miss the 12-month mark by even a few days and the whole gain is taxed, not half of it.

How a Capital Loss Works

If the cost base is higher than what you sell for, you make a capital loss rather than a gain. A capital loss can only reduce a capital gain, in the same income year or a future one, and can never be deducted against your salary, rental income or any other assessable income.

If losses exceed gains in a given year, the excess carries forward indefinitely, with no time limit on using it. Against gains from more than one asset, apply a loss to a non-discounted gain first for the lowest tax outcome.

Why the Contract Date, Not Settlement, Sets the Year

This is the detail that most often surprises property owners. Where there is a contract of sale, and there almost always is for property, the CGT event happens on the date the contract is signed, not the date the sale settles. A property that settles in early July can still have its gain fall in the financial year that just ended, if the contract was signed before 30 June: the contract date locks it in either way.

This matters for planning. The discounted gain is added to your other assessable income for that year and taxed at your marginal rate, so a large gain landing in a year of otherwise high income can push you into a higher bracket than the same gain in a quieter year would. Flexibility over when a contract is signed is one of the few levers an owner has over which year's outcome a sale produces.

None of this applies to a genuine main residence, broadly exempt from CGT: a property never lived in gets no exemption, and one that was home for only part of its life gets only a partial exemption for that period. Our property tax services page covers how we work through sale timing with clients ahead of settlement, not after it.

This Is the Enduring Rulebook, Not the 2027 Reform

Everything above describes how CGT works today, and keeps working for any gain accrued before 1 July 2027. From that date, an already-legislated reform replaces the 50% discount with cost base indexation and a 30% minimum tax rate, covered in full in our article on the negative gearing and CGT reform now law.

Get the Numbers Right Before You Sign

The cost base, the discount and the financial year a sale lands in can all be shaped before a contract is signed, and little can be done about them afterwards. We can work through the numbers on your specific property before you commit to a sale date. Get in touch if you are weighing up when to sell.

Disclaimer: This article contains general information only and does not constitute financial, legal or tax advice. It has been prepared without regard to your objectives, financial situation or needs. Tax and superannuation laws change frequently, and the information in this article may not reflect the current law or may become inaccurate over time. Before acting on anything in this article, you should consider its appropriateness to your circumstances and seek advice from a registered tax agent or qualified adviser.