Selling property in Australia often comes with an unexpected cost, Capital Gains Tax (CGT), which can take many owners by surprise. Whether you’re selling your family home, an investment property, or a commercial site, understanding how CGT works and the strategies that may help reduce or avoid it can make a major difference to your overall financial outcome.
At Ausfirst Lending Group, we’ll walk you through key strategies to manage CGT, tailored insights depending on the type of property you own, and important state-specific considerations for New South Wales (NSW) and Queensland (QLD).
Smart Ways to Reduce or Avoid CGT in Australia
Before diving into specific property types, it’s important to understand the broader strategies Australians commonly use to reduce or legally avoid CGT:
1. Main Residence Exemption
If the property was your primary place of residence (your home), you may qualify for a full CGT exemption under the main residence rule.
2. 50% CGT Discount
Assets held for longer than 12 months are typically eligible for a 50% CGT discount for individuals and trusts.
3. Timing the Sale
Selling in a lower income year, or after retirement, can help reduce the amount of tax payable.
4. Using Capital Losses
Offsetting gains with any recorded capital losses from other investments can significantly reduce your CGT bill.
5. Concessions for Small Businesses
If you’re selling a business property, you may qualify for additional CGT concessions under the ATO’s small business relief programs.
Each method has strict eligibility requirements, so seeking a local mortgage broker’s advice based on your specific situation is strongly recommended.
Not sure which CGT strategy fits your situation? Speak with Ausfirst Lending Group for tailored guidance on reducing property tax impacts.
How CGT Works for Different Types of Property
While general CGT strategies can help you plan smarter, how much tax you pay and how you can potentially reduce it often depends on the type of property you’re selling. Whether it’s an investment property, your main home, a commercial premises, or a rental property, the rules and opportunities vary.
Let’s break down how CGT works across different property types, and the practical steps you may be able to take to minimise the impact.
CGT Strategies for Investment Property Owners
Investment properties are one of the most common triggers for CGT liabilities in Australia. Because they are held for the purpose of generating income, they are fully subject to CGT rules when sold.
However, there are several strategies that investors can consider to manage their tax outcomes and maximise their after-tax returns. Here’s what you should know before listing your property for sale:
1. Holding Period
As mentioned, if you hold the property for more than 12 months before selling, you could access the 50% CGT discount.
2. Capital Improvements
Costs related to major improvements (like renovations) can be added to your property’s cost base, reducing your taxable capital gain.
3. Timing and Income
If possible, consider selling during a year when your overall taxable income is lower to minimise the tax bracket impact.
Expanding Your Investment Property Cost Base to Reduce CGT
When calculating CGT on an investment property, one of the most effective strategies to reduce your taxable gain is by expanding your cost base with eligible expenses. However, many investors overlook key items.
What can increase your cost base?
- Stamp duty and legal fees paid when you originally purchased the property.
- Real estate agent commissions and advertising costs when selling.
- Capital improvements, such as constructing a deck, modernising a kitchen or installing a new roof, can be added to your property’s cost base.
Routine maintenance, such as repairing a leaking tap or repainting walls, cannot be added to your cost base. Only improvements that enhance the property’s value qualify.
Good record-keeping, including invoices, council approvals and photos, is crucial to substantiate these improvements if the ATO ever reviews your return.
CGT Strategies for Homeowners Selling Their Main Residence
The family home holds a special place under Australian tax law, offering powerful CGT exemptions that other properties do not enjoy. However, eligibility depends on how the home was used during ownership, and certain situations, like renting out the property or moving interstate, can create partial CGT liabilities. Understanding how the main residence exemption applies can help homeowners make more informed decisions when selling:
1. Full Exemption
If the home was solely your PPR and wasn’t used to produce income (e.g., renting out rooms), you can generally claim a full CGT exemption.
2. Partial Exemption
If you rented the property for a period, only a partial exemption may apply.
3. Absence Rule
Under the six-year absence rule, you may still treat your property as your primary residence even after moving out and renting it, as long as you do not nominate another property during that time.
Tip: Always keep detailed records if you use the property for mixed purposes.
Selling your home and wondering how the CGT exemption applies? Let us help you navigate your next steps with confidence.
CGT Strategies for Commercial Property Owners
Selling a commercial property can trigger significant CGT, especially for small business owners who have operated from the premises. Fortunately, the Australian tax system offers unique concessions specifically aimed at business assets. If you meet the eligibility criteria, these concessions can dramatically reduce or even eliminate CGT on commercial sales. It’s important to understand your options early in the selling process.
Small Business CGT Concessions
If the commercial property is tied to a small business, concessions such as the 15-year exemption, 50% active asset reduction, and retirement exemptions might apply.
GST Impact
Be mindful of Goods and Services Tax (GST) implications when selling commercial real estate. Although GST and CGT are separate, both may impact the final figures.
CGT Strategies for Rental Property Owners
Rental properties create a slightly different CGT scenario compared to standard investment properties, especially when factoring in depreciation claims, capital works deductions, and periods of private use.
These factors can alter both the property’s cost base and the calculation of taxable gain. Careful documentation and an understanding of how deductions interact with CGT outcomes are key to avoiding costly surprises at sale time.
1. Depreciation Clawback
Depreciation deductions claimed over time reduce the property’s cost base, which may increase your capital gain upon selling.
2. Deductible Costs
Make sure you understand which holding costs (e.g., council rates, insurance) can and cannot adjust your cost base.
3. Apportioning Periods
If the property was your home first, then a rental, CGT needs to be apportioned between the periods of private use and income generation.
Proper record-keeping is critical to maximise allowable deductions and reduce the taxable gain.
How Depreciation Clawback Affects Your CGT
If you’ve claimed depreciation deductions on your rental property, it’s important to understand the concept of depreciation clawback at the time of sale.
Depreciation reduces the property’s written-down value over time. When you sell, the ATO expects you to adjust your cost base by subtracting the total depreciation you’ve claimed, which increases your taxable capital gain.
Example:
- You purchase a property for $500,000.
- Over 5 years, you claim $20,000 in depreciation deductions.
- When selling, your original cost base is adjusted down to $480,000 for CGT purposes.
This can significantly increase the final capital gain, particularly for older properties where depreciation claims were substantial.
Tip: If you still hold the property, consider ordering an updated depreciation schedule to ensure you’re correctly apportioning depreciation claims, especially if renovations were completed.
Apportioning CGT When the Property Was Both Home and Rental
If your property was partly used as your home and partly as a rental, CGT must be apportioned based on the usage periods.
Example:
- You lived in your Melbourne apartment for 2 years, then rented it out for 4 years before selling.
- CGT applies to the 4 years of rental use, not the entire ownership period.
- If you also qualify for the six-year absence rule, this may further reduce or eliminate CGT for part of the rental period.
This can be a complex calculation, so professional advice is highly recommended to ensure you maximise any available exemptions or concessions.
CGT Insights for NSW and QLD Property Owners
While CGT is a federal tax, different states influence your property strategy because of how local costs and policies interact with selling:
New South Wales (NSW)
Sydney’s high property values mean larger potential capital gains and higher CGT liabilities. Careful tax planning, including timing your sale and leveraging the six-year absence rule, can be especially valuable.
Queensland (QLD)
Regional growth corridors, like the Sunshine Coast and Gold Coast, have seen rapid value increases. Investors in QLD often use property upgrades and split-title strategies to improve the cost base and offset capital gains.
Both NSW and QLD investors should also be aware of any future legislative changes around CGT or stamp duty reforms that could impact their plans.
Understanding CGT Rollover and Deferral Options
In some circumstances, you may be able to defer paying CGT, including:
1. Asset-for-Asset Rollover
If you dispose of one active asset and acquire another to continue a business, you may defer CGT under the Small Business Rollover provisions.
2. Marriage/Relationship Breakdown
Transfers of property due to separation are often eligible for rollover relief, meaning CGT is deferred until a later sale.
3. Natural Disasters
In limited cases, such as destruction due to a disaster, CGT deferral may apply.
Keep in mind that deferral does not mean exemption. The gain is simply pushed to a later event.
Examples of CGT Rollover Relief in Action
Small Business Retirement Exemption Example:
If you’re a small business owner selling a business-related property (such as a retail shop), you may be eligible for the Small Business Retirement Exemption. Under this concession, up to $500,000 of the capital gain can be contributed into your superannuation without incurring immediate CGT, provided strict conditions are met.
For business owners approaching retirement, this strategy can provide significant tax benefits while boosting their super balance.
Relationship Breakdown Example:
In the event of a separation or divorce, CGT is often deferred under marriage/relationship breakdown rollover relief. If one spouse transfers property ownership to the other under a court order or formal agreement, the CGT event is disregarded at that time, and the receiving spouse inherits the original cost base.
It’s important to note, however, that when the receiving spouse eventually sells the property, they will be liable for CGT based on the original cost base and period of ownership.
Rollover relief doesn’t cancel the tax; it simply shifts the CGT event to a future time. Planning ahead can help manage the eventual tax implications effectively.
Reinvesting Strategies to Offset CGT Impact
Another method to manage CGT is strategic reinvestment:
1. Superannuation Contributions
Eligible small business owners selling business assets may be able to contribute proceeds to their superannuation fund without breaching standard contribution caps.
2. Property Upgrades Before Sale
Investing in cost base-enhancing renovations before selling can reduce taxable gains.
3. Diversified Asset Reinvestment
Spreading sale proceeds into diversified investments (like shares, managed funds, or another property) could help manage your future tax position more effectively.
However, care must be taken, as reinvestment does not automatically reduce or eliminate CGT unless specific conditions are met.
Managing CGT With Expert Support
Navigating CGT in Australia can feel overwhelming, especially when juggling multiple assets, timelines, or life events like moving interstate or retiring. The good news is that there are many strategies, from holding periods to small business concessions, that may help you reduce, defer or avoid CGT altogether.
However, every property situation is different. A strategy that works for an investment unit in Brisbane might not suit someone selling a commercial warehouse in Sydney.
That’s where expert mortgage brokers and financial advisers come in. By helping you understand your options and connect you with the right tax and legal advice, we can support you in making confident, tax-smart property decisions.
Thinking about selling or reinvesting? Reach out today for a no-obligation chat about how we can help you move forward smarter.
Frequently Asked Questions (FAQs)
Yes, it can. If you lived in the property first, then rented it, you may only qualify for a partial CGT exemption. The ATO typically calculates CGT based on the proportion of time your property was used as your home versus when it generated income. The six-year absence rule could also help, depending on your situation.
Potentially yes, but only if you kept detailed records. Renovations that improve the property’s value (capital improvements) can generally be added to your cost base. However, simple repairs or maintenance (like patching a wall) are not eligible. Having receipts, contracts, and photos is crucial to prove the improvements to the ATO.
Maybe, depending on the circumstances. Inherited properties are subject to CGT when sold, but special rules apply. For properties acquired before 20 September 1985 (pre-CGT), the cost base is generally determined using the market value at the date of death. If they acquired it after, you inherit their cost base. Exemptions may apply if you sell it within two years or live in it as your main residence.
No, not automatically. Buying another property does not defer CGT on the sale of the first one unless you qualify under specific rollover provisions (mainly for active business assets). Residential property sales are not eligible for general CGT deferral just by reinvesting.
Without original purchase documents, calculating CGT becomes much harder and riskier. You might need to reconstruct your cost base using secondary evidence (like bank statements, council records, or historic valuations). The ATO can accept reasonable estimates in some cases, but you must make genuine efforts to substantiate your claim.
