How to avoid capital gains tax when selling your property

Capital gains tax (CGT) is a tax you pay when you sell an investment asset such as property and make a profit (a capital gain).

There are ways you can avoid paying capital gains tax, or at the very least reduce how much you need to pay. For example, you can slash your capital gains tax in half just by owning the investment property for at least 12 months.

In this guide, we’ll explain how to calculate capital gains tax and list the various other ways you can reduce your capital gains tax bill, or avoid it altogether.

Editor’s note: Check the ATO website or seek advice from a registered tax professional to help understand your unique situation.

A capital gain is when you make a profit from selling an asset, and capital gains tax is the tax you may be required to pay on that profit.

Any profit you make counts towards your income for the year, and is calculated at the same rate as your taxable income.

It’s often associated with selling investment property in Australia, but capital gains tax can also apply when selling shares and crypto assets.

In terms of property, your main residence is usually exempt from capital gains tax when you sell it, though there are some exceptions. You can visit the ATO’s website for a detailed list of CGT assets and exemptions .

Any capital gains you earn when selling or swapping an asset must be reported on your tax return for that financial year, but you can reduce your net capital gain by 50% if you meet certain requirements for the capital gains tax discount – more on that below.

To calculate your capital gains tax, take the amount you earned when you sold the asset and subtract the amount it originally cost you to buy, along with any costs you incurred while holding the asset.

Some examples of costs you could have incurred while holding a property include interest paid on an investment home loan, stamp duty, legal fees and transfer costs.

Selling price - original cost (+ holding costs) = capital gain

If you sell an asset less than 12 months after buying it and make a capital gain (a profit), the entirety of your capital gain will be added to your assessable income and taxed accordingly.

If you sell an asset that you’ve held for at least 12 months, you could be eligible for a 50% discount on your capital gains tax by meeting the following requirements:

• You’ve owned the property (the asset) for at least 12 months.
• You’re an Australian resident for tax purposes.

Example of capital gains tax discount

If you make a profit when selling your investment property and you’re eligible for the CGT discount, only 50% of the profit is subject to income tax.

For example, let’s say you buy a property and more than 12 months later you sell it and turn a profit of $100,000. Provided you are eligible for the CGT discount, you can reduce your capital gain by 50%.

Therefore, your net capital gain in this scenario is $50,000. That means only $50,000 will be added to your taxable income, and you’ll ultimately pay less tax.

Did you know?

If you have held an asset since before 21 September, 1999, you can take the amount you originally paid for it and index it by inflation to help reduce your capital gains tax.

If you’re eligible, you can use either the indexation method or the 50% CGT discount when calculating your capital gain, but you cannot use both.

Your best bet is to opt for whichever gives you the smallest net capital gain.

There are a few ways you can avoid capital gains tax when selling an investment property, or at the very least reduce it. Here’s an overview:

• Date of ownership
• Main residence exemption
• Use the six-year rule
• Hold the property for at least 12 months
• Invest in affordable housing
• Increase your cost base
• Your self-managed super fund
• Sell during a low-income year

Let’s break down what each of these means.

Date of ownership

If you first got ownership of your investment property before 20 September, 1985, it will be exempt from capital gains tax.

However, any renovations made to your property after this date are considered a separate asset for tax purposes, and the improvements may be subject to CGT.

Main residence exemption

Your main residence (the place where you live) is generally exempt from capital gains tax.

You could be eligible for this exemption if you and your family have lived in the property since owning it and it sits on two hectares of land or less.

Generally speaking, it also can’t have been used to generate any income, so you typically won’t be able to avoid capital gains tax if you have rented it out, run a business from the premises or bought it with the intention to renovate and flip the property for a profit.

However, there are some exceptions to this, primarily the six-year rule which we’ll run through shortly.

According to the ATO, it will typically consider a property your main residence if it meets the following criteria:

• You and your family live in it.
• You keep your personal belongings in it.
• It’s the address your mail is delivered to.
• It’s your address on the electoral roll.
• Services such as energy and gas are connected to it.

Even if you move out, change your address on the electoral roll, and relocate your personal belongings, a property can retain main residence status indefinitely so long as it’s not used to produce income, such as rental income.

You can learn more about treating a former home as your main residence on the ATO website.

Use the six-year rule

If you use a property you no longer live in to generate income, such as by renting it out, the ATO can allow you to continue treating it as your main residence for up to six years – you might see this referred to as the six-year rule.

However, you’ll only receive a partial main residence exemption when using the six-year rule, so you won’t be able to avoid capital gains tax completely.

To be eligible, you won’t be able to treat any other dwelling as your main residence during this period, except for a limited time if you’re moving to a new home.

Circumstances where you may leave your main residence and start renting it out while you’re away can include extended holidays, or moving away for study or work purposes.

Hold the property for at least 12 months

Any profit from an investment property bought and sold within 12 months will be taxed at your full income tax rate. 

If you’re able to, holding onto the property for longer than 12 months will allow you to reduce your capital gain with the 50% CGT discount (provided you’re eligible).

As mentioned previously, there is also the indexation method as an alternative approach for calculating your capital gain, but you must have had ownership of your property since before 21 September, 1999.

Invest in affordable housing

On 1 January, 2018, the government introduced an additional 10% CGT discount for those who are selling a property that was rented out or provided as affordable housing .

This 10% affordable housing concession can come in addition to the 50% CGT discount, which gives you a maximum of 60% which can be slashed off your tax bill.

There are several conditions that must be met for your property to qualify for the extra discount, some of which are:

• You must be eligible for the 50% CGT discount on the property (in whole or part).
• It must be rented to low or moderate income tenants at below the market rental rate.
• It must be managed through a registered community housing provider.
• You must have provided the property as affordable housing for at least 3 years.

Increase your cost base

Increasing your property’s cost base is another approach to reducing your capital gains tax. 

Your cost base is the amount it cost you to buy the investment property, as well as any costs you incurred while holding and selling the asset.

If you take the cost base of the investment and subtract how much you sold it for, you’ll get your capital gain. But, if you factor in more expenses into your cost base, you can reduce your capital gain and therefore pay less capital gains tax.

According to the ATO, the cost base of a capital gains tax asset is made up of:

• The money you paid for the asset.
• The incidental costs of acquiring the asset, such as stamp duty, property valuation fees and home loan application fees.
• The cost of owning the asset, such as council rates and insurance premiums.
• Capital costs to increase the asset’s value, such as renovations.
• Capital costs of preserving or defending your title or rights to the asset.

Note that if your investment home loan repayments and the costs associated with renting out your property exceed the amount of money you’re earning from the property, you are negative gearing.

It’s important you keep records of all your property-related expenses, so the claims can be supported when lodging your tax return.

Your self-managed super fund

You may be eligible for some generous tax concessions when purchasing an investment property through a self-managed super fund (SMSF).

For example, your capital gains tax will be discounted by a third if you owned the asset for more than 12 months and the sale takes place during the accumulation phase of your SMSF.

If you sell an investment property during the pension phase, you won’t have to pay capital gains tax at all.

Sell during a low-income year

If you know your income will be lower in the next financial year, you could consider delaying the sale of your investment property until then.

Doing so could help to lower your income tax rate and reduce your capital gains tax. This approach requires some planning and foresight, but could save you money if done right.