• Capital gains tax on investment property often applies when you sell or dispose of your property and make a profit.
• To estimate how much capital gains tax you might owe, start by calculating your net capital gain — that’s your total capital gains minus any capital losses, and any discounts or exemptions you qualify for.
• The good news? There are legal strategies and exemptions available that can help you reduce or even eliminate your capital gains tax on investment property.

Are you thinking of selling your investment property but wondering how much capital gains tax (CGT) you might have to pay? As a property investor, understanding capital gains tax on investment property can feel overwhelming especially with all the exemptions, deductions, and ever-changing tax rules.

To make things easier, we’ve put together this simple guide to explain how capital gains tax on an investment property works in Australia, and what you can do to potentially reduce what you owe.

What is Capital Gains Tax on Investment Property?

When you sell an investment property, you’ll either make a capital gain or a capital loss, depending on how much the property value has increased or decreased since you bought it.

According to the Australian Taxation Office (ATO), you make a capital gain if you sell the property for more than what it cost you to acquire and improve it. This cost includes the purchase price, transfer duty, legal fees, agent’s commission, CPI increases and even some capital improvements you’ve made along the way.

While a capital loss happens when you sell the property for less than your total investment.

If you’ve made a capital gain, you’ll need to report it in your annual tax return, and you may need to pay capital gains tax (CGT). In cases you incur a capital loss, you still need to report it. But the good news is, it can be carried forward and to offset capital gains that you’ll acquire in the upcoming years.

When to Pay Capital Gains Tax on Investment Property

You’re generally required to pay capital gains tax on investment property if you sell or dispose of your property and make a profit from it. The Australian Taxation Office (ATO) refers to these events as CGT events, and they don’t just apply when you sell.

Here are some common situations that can trigger a CGT event:

• Selling or transferring ownership of your investment property
• Gifting your property to someone else
• Changing your property’s use (for example, turning it from a rental into your home)
• Passing your property on through inheritance (with some exceptions)

While you don’t need to pay CGT the moment you sell your investment, you need to report the capital gain in your income tax return for the financial year in which the CGT event occurred. This helps the ATO assess your return and determine how much CGT you owe.

How to Calculate Capital Gains Tax on Investment Property

To get a rough idea of how much capital gains tax (CGT) you might owe, the general rule is to compute your net capital gain. You can do this by taking your total capital gains, then subtracting any capital losses and eligible discounts or exemptions which we’ll explore shortly.

But rather than crunching the numbers yourself, we recommend using the ATO’s capital gains tax record keeping tool. This way, you can track the costs and calculate the CGT on your investment property more accurately.

It’s also worth knowing that there are some legal ways to lessen or even avoid paying CGT on your investment property, depending on your situation. Let’s explore how to potentially reduce your capital gains tax bill with these exemptions, discounts, and deductions.

Capital Gains Tax (CGT) Exemptions and Discounts

1. Main Residence Exemption

The Australian Taxation Office (ATO) generally allows you to avoid paying capital gains tax if the property you’re selling was your main residence for the entire time you owned it. This exemption applies when the property was your home.

But what if you’ve turned your home into a rental property? That’s where the absence rule (often called the six-year rule) comes in.

2. Six-Year Rule (Absence Rule)

If you move out of your main residence and rent it out, you can still claim the main residence exemption for up to six years, as long as you’re not treating any other property as your main residence during that time.

In fact, if you’re not earning income from the property (or it’s just sitting and vacant), the exemption may apply indefinitely.

But to qualify for this exemption, you must have lived in the property first. So you can declare it as your principal place of residence before renting it out. It’s a great strategy for investors who plan to return or simply want to avoid CGT for a period after moving out.

3. 50% Capital Gains Tax Discount

If you’re an individual and you’ve owned your investment property for more than 12 months, you may be eligible for a 50% discount on your capital gains tax. This means you’ll only pay tax on half the capital gain you made from selling your property, which gives you potentially large savings.

But there’s a catch:

• The discount only applies if you’ve held the property for 12 months or longer from the date of contract (not the settlement date).
• And you must meet certain eligibility criteria, including being an Australian resident for tax purposes.

This discount is automatically applied when you calculate your net capital gain. But it’s always a good idea to speak with a tax professional to make sure it’s done correctly.

Deductions That May Reduce Capital Gains Tax (CGT)

If you’re selling an investment property, there are certain costs you can claim to help reduce the capital gains tax you might owe. These costs are known as cost base expenses and they can greatly lower your taxable gain if you keep the right records.

Here’s what you can typically include in your property’s cost base:

• Transfer duty and legal fees from when you first bought the property
• The agent’s commission from the sale
• Any renovation or improvement expenses (excluding general repairs or maintenance)
• Certain holding costs, depending on your situation

It’s important to keep proper documentation for everything including receipts, contracts, and invoices because the ATO requires proof of these expenses if you claim them.

This is also where having a tax professional or valuation expert on your side can really pay off. They can help identify the deductions you’re entitled to, make sure your cost base is accurate, and ensure you’re not paying more CGT than you should.

Why Accurate Valuations Matter for Capital Gains Tax on Investment Property

When it comes to working out your capital gains tax on an investment property, a solid property valuation isn’t just helpful, it’s absolutely essential.

Whether you’re buying, selling, or inheriting property, knowing its market value at key points in time can greatly impact how much CGT you might end up paying.

Here’s why a getting a professional valuation matters:

• At the time of purchase: Knowing the property’s market value when you acquire, dispose or change the use of your property from your principal place of residence to an investment property or vice versa helps you calculate your capital gain (or loss) more accurately.
• Inherited property – If you’ve inherited property, you’ll generally need to know its market value at the date of the deceased’s passing to calculate any future CGT.
• Partial sales, subdivisions, or property splits – In more complex situations like selling part of your property or subdividing a land, valuations help you in fairly allocating gains or losses across the portions involved.

Getting an independent valuation means you’re basing your tax report on a fair, justifiable market value. This is especially important if you’re ever audited and the ATO asks for supporting documents.

Final thoughts

Knowing how to calculate your capital gains tax on investment property isn’t just about complying with the ATO’s rules. It’s also about being proactive with your planning, cutting down on what you owe, and ultimately making the most of your investment.

If you’re unsure where to start, the ATO’s Capital Gains Tax calculator is a great way to get a quick estimate. But when it comes to locking in the right numbers, especially around your property’s market value, it’s worth having an expert on your side. And that’s where we can help.

At Independent Property Valuations (IPV), we work with property investors across Sydney, delivering accurate and independent property valuations that make CGT reporting simpler and more reliable. So, if you’re getting ready to sell, gifting a property, or dealing with something a little more complex, we’re here to help you assess your property and make sure it reflects an up-to-date and true market value. So you don’t have to pay more CGT than you need to.

Need help with your property valuation for CGT?

Get in touch today and we’ll make sure you get the right support and a professional valuation you can rely on for your next tax return.

*This article is for general informational purposes only and does not constitute legal, financial, or taxation advice. For personalised advice, please consult a qualified accountant, tax advisor, or the Australian Taxation Office.