How Capital Gains Tax Works on Property
Capital Gains Tax (CGT) is the tax you pay on the profit when you sell an investment property. It's added to your taxable income in the year of sale.
Basic calculation:
- Purchase price (cost base): $700,000
- Selling price: $1,000,000
- Capital gain: $300,000
- Added to your income and taxed at your marginal rate
The 50% CGT discount: If you hold the property for more than 12 months, you only pay tax on half the gain.
- Capital gain: $300,000
- After 50% discount: $150,000
- Tax at 45% marginal rate: $67,500
- Without discount: $135,000
- Saving: $67,500
What's included in cost base (reduces your taxable gain):
- Original purchase price
- Stamp duty paid
- Buyer's agent fee ($15,800 + GST)
- Legal/conveyancing costs
- Capital improvements (renovations, granny flat construction)
- Building and pest inspection fees
Example with granny flat:
- Purchase: $700K + $37K stamp duty + $15.8K BA fee + $110K granny flat = $862.8K cost base
- Sale at $1M: Capital gain = $137,200 (not $300K)
- After 50% discount: $68,600
- Tax at 45%: $30,870 — dramatically less than $67,500
The 6-Year Rule — 100% CGT-Free Strategy
The 6-year rule is the most powerful CGT strategy available to Australian property owners:
How it works:
- Buy a property and live in it as your primary residence for 6–12 months
- Move out and rent it as an investment for up to 6 years
- Sell within the 6-year window
- Pay zero CGT on the entire gain
Example:
- Buy for $700K in 2026
- Live in it for 12 months (2026–2027)
- Rent it out for 5 years (2027–2032)
- Sell for $1,050K in 2032
- Capital gain: $350,000
- CGT payable: $0 (6-year rule applies)
Tax saved: $350K × 50% discount × 45% rate = $78,750
Important rules:
- You can only claim one property as your primary residence at a time
- The 6-year clock resets if you move back in (even briefly)
- Works with VHF scheme: Live in for 12 months (VHF requirement), then convert to investment
- If you rent it for more than 6 years, CGT applies proportionally
Our recommendation: For first-time investors using VHF or FHOG, this is the ideal strategy. The mandatory 12-month occupancy requirement for VHF naturally sets you up for the 6-year CGT exemption.
Ownership Structure & CGT Implications
Personal name: Best for negative gearing (losses offset personal income at your marginal rate). CGT 50% discount applies after 12 months.
Family Trust: Income can be distributed to lower-income family members. CGT 50% discount still applies. Higher land tax (~$4,000 vs ~$1,900 on equivalent property). Best when property is positively geared.
SMSF: CGT is 0% in pension phase (age 60+). During accumulation phase, CGT is taxed at 15% (with 33% discount for assets held 12+ months = effective 10%). Best for long-term holds with no construction plans.
Company: Flat 25% company tax rate (no 50% CGT discount). Rarely used for property investment.
Our recommendation by portfolio stage:
PremiumRea is not a registered tax agent and holds no Australian Financial Services Licence or Australian Credit Licence. Capital gains tax outcomes and ownership-structure choices are questions for a registered tax agent; borrowing against a property is a question for a licensed mortgage broker. We have removed from this section a structure-selection rule ("properties 1–2 personal name, property 3+ family trust, retirement asset SMSF") and a "refinance-to-avoid-CGT" strategy with a worked extraction — both were recommendations we are not licensed to make, and the second also asserted a valuation outcome we cannot substantiate.
The one point we will make, because it is a matter of fact rather than advice: borrowing against a property is not a disposal, so it does not of itself trigger a CGT event — but the borrowed funds are borrowed, they carry interest, and the deductibility of that interest depends on the use to which the funds are put. Take it to your tax agent. See ATO — Capital gains tax.