Capital Gains Tax on an Investment Property

General information only. This article provides general information for Australian property investors. It is not tax, legal or financial advice. CGT outcomes are highly specific to your circumstances and the figures can be large, so get advice from a registered tax agent before you sell. Based on Australian Taxation Office (ATO) guidance current at the time of writing.

When you sell an investment property in Australia for more than it cost you, the profit is a capital gain — and capital gains tax (CGT) applies. It isn't a separate tax with its own rate: the gain is added to your assessable income for that year and taxed at your marginal rate, which is why a big gain can mean a big tax bill. The good news is the rules include some significant, entirely legitimate ways to reduce what you pay. This guide explains how CGT on a rental property works, how to calculate it, and how to reduce it the right way. For the deductions you claim while you hold the property, see Rental Property Tax Deductions: What You Can Claim in Australia.

How CGT on a rental property works

CGT applies when a "CGT event" happens — most commonly when you sell the property. Your capital gain is, broadly:

Capital proceeds (sale price) − cost base = capital gain

If the proceeds are more than your cost base, you have a capital gain. If they're less, you have a capital loss (more on that below). Unlike your main residence, which is generally CGT-exempt, a pure investment property gets no main residence exemption — the whole gain is in scope.

A crucial timing point: for CGT, the date you acquired (and sold) the property is the contract date, not the settlement date. That single fact decides whether you qualify for the 50% discount below, so it's worth getting right.

The 50% CGT discount

This is the big one. If you are an Australian resident for tax purposes and you owned the property for at least 12 months, you generally only pay tax on half your net capital gain — a 50% discount.

The 12-month clock starts the day after the contract date you acquired the property and runs to the contract date you sell. Selling even a day short of 12 months can cost you half the discount, so timing a sale matters.

Foreign and temporary residents may not get the full discount for periods after 8 May 2012.

Your cost base — the bigger it is, the smaller the gain

Your cost base is far more than just the purchase price. The ATO recognises five elements:

1. What you paid for the property 2. Incidental costs of buying and selling — stamp duty on purchase, conveyancing and legal fees, agent's commission on sale 3. Costs of owning the property — interest, rates, insurance, maintenance — to the extent you couldn't and didn't claim them as a deduction (generally for property acquired after 20 August 1991) 4. Capital costs to improve or preserve the property's value (capital improvements) 5. Capital costs of defending your title to the property

This is why the record-keeping advice across this whole site matters so much: every legitimate cost you can add to the cost base directly reduces your taxable gain. The receipts you keep for 20 years are worth real money at sale.

The capital works catch

One important reduction works against you: any capital works deductions (the Division 43 building write-off) you have claimed, or were entitled to claim, generally reduce your cost base. So the 2.5%-a-year building deduction you enjoyed each year effectively increases the capital gain when you sell.

It's still usually worth claiming — a deduction now is worth more than the same amount later — but you need to factor it in.

A worked example

Priya, an Australian resident, buys a rental unit under a contract dated 1 March 2014 for $500,000. With stamp duty and legal fees her acquisition costs are $25,000. Over the years she makes a $40,000 capital improvement. She sells under a contract dated 1 June 2025 for $760,000, with $20,000 of selling costs.

• Capital proceeds: $760,000
• Cost base: $500,000 + $25,000 + $40,000 + $20,000 = $585,000 (then reduced by any capital works deductions claimed — say $30,000 — giving $555,000)
• Capital gain: $760,000 − $555,000 = $205,000
• Held > 12 months, Australian resident → 50% discount: $205,000 × 50% = $102,500 added to her assessable income that year.

That $102,500 is taxed at her marginal rate. The numbers are illustrative — your figures and the capital works adjustment will differ, so confirm with your tax agent.

Legitimate ways to reduce CGT on an investment property

These are accepted approaches, not loopholes — but each depends on your situation, so treat them as things to discuss with your registered tax agent, not a checklist to apply blindly:

• Hold for more than 12 months so you qualify for the 50% discount. Selling at 11 months can be an expensive mistake.
• Keep every cost-base record. Purchase costs, capital improvements and selling costs all lift the cost base and shrink the gain. This is the single most controllable factor.
• Use capital losses. A capital loss on another asset (shares, another property) in the same year offsets the gain; unused capital losses carry forward indefinitely to future gains. (Capital losses can't be used against salary or other income.)
• Time the sale. Because the gain lands in the income year of the contract date, the year you sell — and your income in that year — affects the tax. Selling in a lower-income year, or not bundling two big gains into one year, can help.
• Consider ownership structure before you buy. Whose name(s) the property is in, and in what shares, affects whose marginal rate the gain is taxed at. This is a before-you-buy decision, not a fix at sale.
• The main residence exemption, where a property genuinely was your home for a period, can partly apply — but the rules are intricate (see renting out part of your home).

What you should not do is anything that misstates the facts — undervaluing proceeds, inventing cost-base items, or backdating. CGT is an ATO focus area on property, and the records have to stand up.

Records are everything (keep them for the whole time you own it)

You can only reduce a gain with costs you can prove. Keep the contract of purchase and sale, conveyancing, stamp duty, every capital improvement invoice, and your record of capital works deductions claimed — for the entire period you own the property plus 5 years after you sell. This is exactly the long-life record set ledger.rent is built to hold alongside your year-to-year income and expenses, so that when you sell, the cost base is already documented rather than reconstructed from memory. It doesn't calculate your CGT or give advice — it keeps the evidence your accountant needs to.