CGT on Investment Property

When you sell an investment property in Australia, the profit is subject to capital gains tax (CGT). This isn't a separate tax — your capital gain is added to your assessable income for the financial year and taxed at your marginal tax rate.

The basic formula:

Capital gain = Sale price − Cost base

Property CGT is where the largest dollar amounts are typically at stake. A $200,000 gain on a Sydney apartment dwarfs most share portfolio gains — which is exactly why getting every cost base element right matters so much. Missing a single item (stamp duty, a renovation, selling costs) can cost you thousands in unnecessary tax.

This guide covers investment properties — properties you bought as an investment and have never lived in. If you lived in the property before renting it out, you may qualify for a partial main residence exemption, which is covered in Section 7 below.

For a plain-English introduction to how CGT works in general, see our What is Capital Gains Tax? guide.

The contract date (date of exchange) is the CGT event date for property — not the settlement date. This is the single most asked question in property CGT, and getting it wrong can put your gain in the wrong financial year.

• Acquisition date: The date you signed the contract to buy the property
• Disposal date: The date you signed the contract to sell the property

If you exchange contracts on 25 June 2026 but settlement occurs on 20 August 2026, the capital gain falls in FY2025–26 (the June year), not FY2026–27. This matters enormously for tax planning — see timing strategies below.

The 12-month discount rule is precise. The holding period is measured from the day after the purchase contract date to the sale contract date. If you signed the purchase contract on 1 March 2024, the earliest you can sell with the 50% discount is 2 March 2025. Selling on 1 March 2025 — one day early — means you lose the discount entirely and pay tax on the full gain.

If you're selling close to the 12-month mark, delaying the contract exchange by even one day can halve your taxable gain.

Your cost base is not just the purchase price. The ATO defines 5 elements that make up your cost base — and for property, these can add up to tens of thousands of dollars that directly reduce your capital gain.

The no-double-dipping rule

If you've already claimed a cost as a tax deduction, you cannot also include it in your cost base. For a rental property, this typically excludes:

• Loan interest (claimed against rental income each year)
• Property management fees (deducted annually)
• Insurance, council rates, water rates (deducted annually)
• Repairs and maintenance (deducted in the year incurred)

These costs gave you a tax benefit when you claimed them — they don't get a second benefit at sale.

Stamp duty is often the biggest overlooked cost base item

Stamp duty on an investment property purchase goes into Element 2 of your cost base. The amount varies significantly by state:

Figures are approximate for FY2025–26 and may vary based on property type, buyer status, and concessions. Use our sister site's Stamp Duty Calculator for exact figures.

For more detail on all 5 elements, see our Understanding Your Cost Base guide.

This is one of the most commonly misunderstood aspects of investment property CGT — and it can add tens of thousands of dollars to your capital gain.

What is Division 43?

If your property's building structure was constructed after 15 September 1987, you can claim an annual tax deduction of 2.5% of the original construction cost under Division 43 of the ITAA 1997. This covers the structural elements: walls, floors, roof, and fixed fixtures. Most investment property owners claim this deduction via a depreciation schedule prepared by a quantity surveyor.

The clawback rule

When you sell, any Division 43 deductions you have claimed are subtracted from your cost base under section 110-45. This increases your capital gain.

Here's how the numbers work on a typical apartment:

• Construction cost (building structure): $300,000
• Years of ownership: 10 years
• Div 43 deductions claimed (2.5% × $300,000 × 10): $75,000

The impact on your capital gain:

The clawback adds ~$13,875 in extra tax in this example. You're still ahead overall — the $75,000 in deductions saved approximately $27,750 in tax over 10 years (at 37%), while the clawback costs $13,875 after the discount. But if you haven't planned for it, the larger-than-expected CGT bill at settlement can be a shock.

Division 40 is different

Division 40 covers plant and equipment items (carpet, blinds, appliances, hot water systems). These get a balancing adjustment at sale, not a cost base reduction. The treatment is different and generally less punitive. For details, see our Depreciating Assets and CGT guide.

Get a depreciation schedule early

Order a depreciation schedule from a quantity surveyor when you buy the property, not when you sell. It identifies the Division 43 construction cost for your annual deductions and helps you plan for the eventual clawback at sale.

This distinction is financially significant and frequently confusing. The difference determines whether a cost gives you a tax deduction now or reduces your CGT later — and it's never both.

• Capital improvements (Element 4 of cost base): Work that improves the property beyond its original condition, or replaces an entire structural component. Added to your cost base → reduces your gain when you sell.
• Repairs (deductible against rental income): Work that restores the property to its original condition. Deducted in the year you incur it → immediate tax benefit, but does NOT reduce your cost base at sale.

The "initial repair" rule

If you buy a property in poor condition and do work within the first year to make it rentable, the ATO often treats those costs as capital in nature — not deductible repairs. The reasoning: you paid a lower price knowing the work was needed, so the repairs are effectively part of your acquisition cost. These go into your cost base.

Mixed renovations

A major renovation often includes both repairs and improvements. You need to apportion the costs. The ATO expects you to have separate invoices or a reasonable basis for splitting. Ask your tradesperson for itemised quotes that separate repair work from improvement work.

The CGT discount is one of the most valuable concessions in Australian tax law for property investors. If you hold the property for at least 12 months, you can reduce your capital gain before it's added to your income.

The discount rate depends on the entity that owns the property:

Loss ordering: this is where people get it wrong

If you have capital losses (from shares, crypto, or other assets), the law requires you to apply them in a specific order:

1. Calculate your total capital gains for the year
2. Subtract any capital losses (current year + carried forward)
3. Then apply the 50% discount to the remaining gain

Getting this backwards costs you money. Here's why:

• Correct: $200,000 gain − $30,000 loss = $170,000 → 50% discount → $85,000 assessable
• Wrong: $200,000 gain → 50% discount → $100,000 − $30,000 loss → $70,000 assessable ← incorrect, underpays tax

The wrong method actually gives a lower taxable amount, but it's not what the law requires. The ATO will reassess if they detect it.

For assets acquired before 21 September 1999, you can alternatively use the indexation method — adjusting your cost base by CPI movements up to September 1999. Our CGT calculator compares both methods automatically and applies whichever gives you the better result.

For more detail, see our 50% CGT Discount guide.

If the property was your main residence for part of the time you owned it, you don't have to pay CGT on the entire gain. Two key rules can reduce your CGT significantly.

The 6-year absence rule

If you move out of your main residence and rent it out, you can continue to treat it as your main residence for CGT purposes for up to 6 years. Conditions:

• You cannot treat another property as your main residence during that time
• If you move back in before 6 years, the clock resets — you get another 6 years if you move out again
• There's no limit to how many times you can use this rule

If the 6-year absence rule covers your entire rental period, you pay zero CGT on the property when you sell.

The market value reset rule (section 118-192)

When you first use your main residence to produce income (e.g., start renting it out), the cost base is deemed to reset to the property's market value on that date. This means:

• The gain while you lived in it → tax-free (covered by the MRE)
• Only the gain since you started renting → assessable for CGT

This is enormously valuable in a rising market. If you bought for $400,000, the property was worth $680,000 when you started renting, and you sold for $850,000 — your assessable gain is only $170,000 (the rental-period gain), not $450,000 (the total gain). The $280,000 gain while you lived there is completely tax-free.

Important: If you use the market value rule, you cannot also use the 6-year absence rule for the same period. It is worth calculating both methods and choosing the better one — our MRE Calculator does this comparison automatically.

Foreign resident denial

Since 1 July 2020, foreign residents at the time of the CGT event cannot claim the main residence exemption at all — even for years they lived in the property as an Australian resident. A limited life events exception applies (death, terminal illness, relationship breakdown).

For the full picture, see our Main Residence Exemption guide.

Let's walk through a complete, realistic scenario with every cost base element, the Division 43 clawback, and a full tax calculation.

The scenario: Pete (age 48) earns a $130,000 salary plus $25,000 in net rental income. He bought a Brisbane investment apartment in July 2015 for $520,000 and sells it in March 2026 for $780,000. He has a $12,000 carried-forward capital loss from shares sold in FY2023–24.

Step 1: Calculate the cost base

Note: Pete claimed loan interest, property management fees, insurance, and council rates as tax deductions each year — these are NOT included in the cost base.

Step 2: Calculate the capital gain

• Capital proceeds: $780,000
• Cost base: $548,660
• Capital gain: $780,000 − $548,660 = $231,340

Step 3: Apply carried-forward losses

• Capital loss offset: −$12,000
• Gain after losses: $231,340 − $12,000 = $219,340

Step 4: Apply the 50% CGT discount

Pete held the property from July 2015 to March 2026 (over 10 years), so the 50% discount applies:

• Discounted gain: $219,340 × 50% = $109,670

Step 5: Calculate the tax impact

Pete's other income is $130,000 + $25,000 = $155,000. His discounted gain of $109,670 is added to this:

Without the capital gain, Pete's tax on $155,000 would be $38,688.

Extra tax from the property sale: $85,240 − $38,688 = $46,552

Plus approximately $2,193 in additional Medicare levy (2%) on the capital gain.

That's an effective tax rate of approximately 20.1% on the original $231,340 gain — well below the top marginal rate, thanks to the 50% discount.

This is the most common partial-exemption scenario — and the market value rule can save tens of thousands.

The scenario: Mei-Lin bought a Melbourne apartment in March 2014 for $430,000 as her home. She moved interstate in July 2019 and started renting it out. The market value at the time she first rented it was $620,000. She did not use the 6-year absence rule (she bought a new home interstate). She sold the apartment in February 2026 for $780,000. Her salary is $95,000.

Step 1: Apply the market value rule

Because Mei-Lin first used the property to produce income in July 2019, her cost base resets to the market value at that date: $620,000. The $190,000 gain while she lived in it ($620,000 − $430,000) is completely tax-free.

Step 2: Calculate the cost base for the rental period

Step 3: Calculate the gain

• Capital proceeds: $780,000
• Cost base: $611,617
• Capital gain: $780,000 − $611,617 = $168,383

Step 4: Apply the 50% discount

• Discounted gain: $168,383 × 50% = $84,192

Step 5: Tax impact

Mei-Lin's total taxable income: $95,000 + $84,192 = $179,192

Without the capital gain, Mei-Lin's tax on $95,000 would be $19,288.

Extra tax from the property sale: $47,639 − $19,288 = $28,351

The $190,000 gain while she lived in the apartment? $0 tax. The market value rule ensured she only pays CGT on the gain since she started renting.

Australian real property is always Taxable Australian Property (TAP) — foreign residents are subject to CGT on Australian property sales regardless of where they live. Three major rule changes in recent years have made property CGT significantly more expensive for foreign residents.

1. Main residence exemption denied (from 1 July 2020)

Foreign residents at the time of the CGT event cannot claim the main residence exemption — even for years when they were Australian residents living in the property. If you move overseas permanently and sell your former home, you get no MRE.

A limited life events exception applies: you can still claim the MRE if the sale is due to terminal illness, death, or relationship breakdown, provided the property is sold within a specified period.

2. CGT discount restricted (from 8 May 2012)

For properties acquired after 8 May 2012, the 50% discount is pro-rated based on your Australian resident days:

Discount = (Australian resident days ÷ total ownership days) × 50%

If you were a foreign resident for the entire ownership period, the discount is 0% — you pay tax on the full gain. If you were an Australian resident for half the time, you get a 25% discount.

3. Foreign Resident CGT Withholding — FRCGW (updated January 2025)

When a foreign resident sells Australian property, the buyer must withhold a percentage of the sale price and remit it to the ATO:

From 1 January 2025, the buyer must withhold 15% of the sale price on every foreign-resident property sale — regardless of the property's value. On a $780,000 property, that's $117,000 withheld at settlement.

Clearance certificates for Australian residents

If you are an Australian resident selling property, it is necessary to obtain a clearance certificate from the ATO before settlement. Without one, the buyer is legally required to withhold 15% — even if you are an Australian citizen. Processing takes 1–28 days, so apply well before settlement.

For more detail, see our Foreign Resident CGT Rules guide and the Foreign Resident CGT Calculator.

Because CGT is taxed at your marginal rate, the financial year in which the gain falls — and your other income in that year — can make a significant difference to the tax you pay.

Strategy 1: Sell in a low-income year

If you're taking a career break, going part-time, on parental leave, or retiring, a capital gain in that year will be taxed at lower marginal rates. A gain that starts in the 30% bracket (other income under $135,000) costs significantly less tax than one that starts in the 45% bracket (other income above $190,000).

Strategy 2: Exchange contracts after 1 July

Because the CGT event date is the contract date, delaying exchange from late June to early July pushes the entire gain into the next financial year. This is legal, routine, and can be planned with your solicitor when you list the property. This is especially useful if your other income is unusually high in the current FY.

Strategy 3: Spread multiple disposals across financial years

If you're selling multiple investment assets, consider selling one each financial year rather than all in the same year. Each year's gain fills the lower tax brackets independently.

Strategy 4: Tax-loss harvesting

If you hold shares or other investments at a loss, selling them before or in the same financial year as the property creates a capital loss that offsets your property gain. The loss is applied before the 50% discount, so its impact is effectively doubled.

Strategy 5: Maximise concessional super contributions

A $30,000 concessional super contribution (salary sacrifice or personal deductible contribution) reduces your taxable income, which can push the top portion of your gain into a lower tax bracket.

The ATO can deny cost base additions if you cannot produce evidence. A $25,000 renovation without an invoice is $25,000 you cannot claim against your gain. This section lists the specific documents you need.

Acquisition records

• Signed contract of sale (purchase)
• Settlement statement from your solicitor
• Stamp duty receipt (or settlement statement showing duty paid)
• Building and pest inspection invoice
• Conveyancing fees invoice (purchase)
• Loan documents (to establish which costs were deductible vs non-deductible)

Ownership records

• Depreciation schedule from a quantity surveyor
• All tax returns showing Division 43 and Division 40 deductions claimed
• Invoices for all renovations and improvements — with dates, descriptions, and amounts
• Before-and-after photos of renovation work (helps distinguish repairs from improvements)
• Council approval documents for structural work
• Receipts for non-deductible ownership costs (if any, e.g. vacant land holding costs)

Disposal records

• Agent engagement agreement (confirms commission rate)
• Marketing and advertising invoices (professional photography, online listings, print advertising)
• Contract of sale (your copy, with exchange date clearly recorded)
• Settlement statement (sale)
• Conveyancing fees invoice (sale)
• Auctioneer or styling fees invoice (if applicable)

How long to keep records

The ATO requires CGT records for 5 years from the date you lodge the tax return that includes the CGT event. For a property sold in FY2025–26, if you lodge in October 2026, keep records until at least October 2031.

Practically: keep property records indefinitely. You may need them for related calculations, ATO queries, or disputes that arise years later.

Pro tip: Scan and store everything digitally — paper receipts fade over 10+ years. The ATO accepts digital copies as valid records. Create a dedicated folder for each property.