Capital Gains Tax Considerations When Selling Your Residential Property in Australia

Introduction: Selling a residential property can be an exciting milestone, but it also carries important tax implications. In Australia, profits from selling property may be subject to Capital Gains Tax (CGT) – which is essentially a tax on the profit you make from the sale. Fortunately, there are significant exemptions (for example, your family home is generally exempt from CGTjenkinslegal.com.au) and concessions available. This guide explains what every property seller should consider about CGT, including main residence exemptions, partial exemptions for rental or business use, and how capital gains are calculated and taxed. We’ll also walk through case study examples and provide links to official Australian Taxation Office (ATO) guidance for clarity on the rules.

What is Capital Gains Tax (CGT) on Property?

CGT is the tax you pay on a capital gain – the profit from selling an asset for more than you bought it. It’s not a separate standalone tax, but rather part of your income tax for the year (the gain is added to your assessable income)jenkinslegal.com.au. Here are some key points about CGT in the context of property sales:

• Capital gain or loss: Your capital gain is basically the difference between what it cost you to buy and improve the property and the amount you receive when you sell itato.gov.au. If you sell for more than your total cost (purchase price plus costs like stamp duty, legal fees, and improvements), you have a capital gain. If you sell for less, you incur a capital lossjenkinslegal.com.au. (Capital losses can’t reduce your regular income, but they can be used to offset capital gains in the same year or carried forward to future yearsjenkinslegal.com.au.)

• Not all gains are taxed: Some assets are fully exempt from CGT – notably your main residence (home) in most cases, and any assets acquired before 20 September 1985 (when CGT was introduced)jenkinslegal.com.au. We’ll discuss the home exemption in detail below. If an asset is exempt, you ignore any gain or loss on sale for tax purposes.

• CGT is triggered by a sale (or disposal): For tax purposes, selling property is considered a CGT event (specifically CGT event A1, the disposal of an asset). The timing of the CGT event is usually the contract date – not the settlement date – in the year you sign the contract to sellmacquariegs.com.au. This means the capital gain (if any) will generally be reported in the tax year when contracts are exchanged, which is important for tax planning.

• 50% discount for long-term ownership: Australian resident individuals (and some trusts) are eligible for a 50% CGT discount on a gain if they owned the property for at least 12 months before sellingmacquariegs.com.au. In other words, only half the capital gain is taxable. For example, if you realize a $100,000 gain on a property held more than one year, $50,000 would be added to your taxable income (the other $50k is tax-free under the discount). This discount does not apply to companies, nor to properties held less than 12 months. (There are also no discounts on capital losses – losses are fully deductible against gains, without any halving.)

• Tax rate on the gain: After applying any discounts or exemptions, your net capital gain is added to your income and taxed at your marginal income tax rate for the year. There isn’t a flat “CGT rate” – it depends on your income bracket. A large gain could push you into a higher tax bracket, so planning the timing of the sale can be wise if possible.

Selling Your Main Residence: The CGT Home Exemption

Most Australians sell their home (principal place of residence) without incurring any CGT. This is thanks to the Main Residence Exemption, which can make the entire capital gain on a family home tax-free, provided certain conditions are met. According to the ATO, your home is fully exempt from CGT if all of the following applymacquariegs.com.au:

• You’re an Australian resident for tax purposes, and the property has been your home (primary residence) for the whole period you owned it – this generally means you or your family lived there continuously from purchase to sale.

• The property was not used to produce income during your ownership – for example, you didn’t rent out any part of it, run a business from it, or flip it (buying purely to renovate and sell at a profit)macquariegs.com.au.

• The land area is 2 hectares or less (most suburban home blocks are under this size).

If you meet all these conditions, any capital gain on the sale is completely disregarded – you do not pay tax on the profit, and you don’t even report the gain in your tax returnmacquariegs.com.au. (Likewise, if you happened to sell at a loss, the loss is not deductible or reportable either – the transaction is simply ignored for tax.) This full exemption on a qualifying main residence is extremely valuable, often saving tens of thousands in tax.

What if you don’t meet all the conditions? You might still get a partial exemption if the property was your home for only part of the ownership period or if you used part of it to earn income at some pointmacquariegs.com.au. In such cases, the portion of time (or portion of the property) that doesn’t qualify for the exemption will be subject to CGT. The next sections explain these situations – for example, homes that were rented out or used for business for a period of time – and how the CGT is calculated in those cases.

Using Your Property to Produce Income: Partial CGT Scenarios

Life isn’t always black-and-white, and many homeowners use their property in mixed ways – perhaps renting out a spare room, or moving out and leasing the house for a few years. The tax law accounts for these scenarios by granting a partial main residence exemption. Essentially, you’ll pay CGT only on the portion of the gain that corresponds to the property’s non-main-residence use (the time or space it was used to earn income). Here are two common scenarios:

1. Renting out part of your home or running a home business (while you live there)

If you never moved out, but you did use part of your dwelling to produce income – for example, you rented a room to a tenant, listed a room on Airbnb, or used one room exclusively as a home office for your business – then you cannot claim the full main residence exemption. The part of the property used for income is subject to CGT on salemacquariegs.com.au. However, the portion you used as your private home remains exempt.

When such a mixed-use property is sold, the ATO will require you to apportion the capital gain between the exempt and taxable portions. The calculation generally considers:

• Floor area – what percentage of the home’s floor area was set aside for rental or business use (e.g. one room out of a five-room house = 20%).

• Time – the length of time you used that part of the home to produce income relative to your total ownership period.

• Capital improvements and market value changes – the growth in value of the property, usually from the time you first used part of it for incomemacquariegs.com.au. If you started using part of your home for income after 20 August 1996, there is a special rule that allows you to get a market value of the property at that point and use that as a cost base for the calculationmacquariegs.com.au. This effectively splits the gain into “before income use” and “after income use” components.

For example, suppose you bought a house, lived in it normally for 2 years, then in year 3 you began renting out a spare room (25% of the home’s area) for the next 4 years. When you sell the house, you would calculate the taxable portion of the gain roughly as 25% (area used to produce income) × 4/6 (the fraction of ownership years it was rented) × total capital gain. That portion would be subject to CGT (and eligible for the 50% discount if you owned the home more than 12 months), while the rest of the gain is exempt. The ATO strongly recommends getting a professional valuation of your property at the time you first rent out part of it or start a home businessmacquariegs.com.au. This valuation helps establish the cost base for the taxable portion and makes the calculations much more accurate.

2. Moving out and renting your home (the “6-Year Rule”)

Another common scenario is when you move out of your home – for example, due to work or lifestyle changes – and rent it out to tenants. In this case, you stop living in the property but it remains an investment property until you sell. The tax law provides a very useful break for this: even after you move out, you can choose to treat the property as your main residence for up to 6 years while it’s rented outmacquariegs.com.au. This is often called the “6-year rule.” Key points to understand about this rule:

• Up to 6 years exemption: If you rent out a property that was your home, you can continue to claim the main residence CGT exemption on it for a period of up to six years of absencemacquariegs.com.au. During this time, any capital gain on sale can still be fully tax-free, provided you do not treat any other property as your main residence in the interim. (If you don’t use the property to produce income – say you leave it vacant or allow family to live there rent-free – you can actually continue treating it as your main residence indefinitely after moving outmacquariegs.com.au. The six-year limit applies only once you earn income from the property.)

• Resets if you move back in: The 6-year period resets if you move back into the home. For instance, you could rent your house for 5 years, move back and live in it again for a while, then move out and rent it again for up to another 6 years, and still claim full exemption on sale. Each absence (rental period) can be exempt up to 6 years as long as you re-establish it as your actual residence between absencesmacquariegs.com.aumacquariegs.com.au.

• Exceeding the 6-year limit: If you rent out the property for more than six years in one continuous period of absence, you will get a partial exemption. The portion of the gain corresponding to the period beyond 6 years of rental will be taxablemacquariegs.com.au. In effect, the tax-free period is capped at 6 years – any rental beyond that is pro-rated into the taxable gain. When calculating the gain in this scenario, the law lets you apportion based on time or, alternatively, use the special rule mentioned earlier: use the market value at the point 6 years after you moved out (or at the point you first started renting, if the home was never fully exempt before) as the cost base to determine the taxable portionmacquariegs.com.au. This ensures you’re only taxed on the growth after the exempt period ended.

📌 Note: If you choose to use the 6-year rule for an old home you’ve moved out of, be aware that you cannot claim another home as your main residence simultaneously. You only get one main residence exemption at a time (except for a brief 6-month overlap allowed when you are moving from one home to another). So, if you move out and rent your old house while buying a new home to live in, you’ll eventually have to pick which property to claim the exemption on when you sell – often this means one of the two sales will face some CGT. Tax advisors can help evaluate which choice yields a better outcome.

Selling an Investment Property: Taxable Capital Gains

If the property you’re selling was never your main residence (for example, a rental property that you bought purely as an investment, or a holiday home that you didn’t live in as your primary home), then the main residence exemption won’t apply at all. In this case, any capital gain is fully taxable (though the 50% discount may reduce it if you owned it over a year). Here’s what to consider:

• Calculating the gain: As with any asset, the capital gain = sale proceeds minus cost base. The cost base includes the price you paid plus incidental costs of buying, holding, and selling the propertyato.gov.au. This typically means your purchase price plus expenses like stamp duty, legal fees, buyers’ agent fees, and capital improvements (renovations, extensions, etc.), minus any government grants or rebates. It also includes selling costs such as real estate agent commission and legal fees on sale. Take all these into account – they increase your cost base, thereby reducing the gain. (Conversely, if you incurred a capital loss on the sale, the loss is the cost base minus sale price.)

• Depreciation adjustments: One important nuance for investment properties is that if you claimed capital works deductions (building depreciation) or other depreciation on assets in the property during ownership (for example, via yearly tax deductions for wear and tear), you must exclude those amounts from your cost baseato.gov.au. In simple terms, you don’t get to deduct something twice: depreciation gives you a tax benefit during ownership, but it also reduces the remaining cost base of the property for CGT purposes (which increases your capital gain on sale). It’s a good idea to have your accountant or quantity surveyor provide a depreciation schedule and keep track of total depreciation claimed, as this will be needed when calculating the final gain.

• Applying the CGT discount: As mentioned, individual investors get a 50% discount on the capital gain if they owned the property for more than 12 monthsmacquariegs.com.au. So, only half the gain is added to your income. (If held for a shorter period, the full gain is taxable – which can be quite costly, so timing matters.) Remember that the holding period is measured from contract date to contract date, typically. For instance, buying in January 2024 and selling in January 2025 would not qualify for the discount because the contracts are only 12 months apart – you’d need to sell in February 2025 or later to exceed 12 months. Also, note that non-residents for tax purposes are not eligible for the 50% discount on gains accruing after May 2012 (the law was changed), and as a foreign resident you also cannot claim the main residence exemption at allmacquariegs.com.au. If you’ve become a non-resident, different CGT rules may apply to your property sale (seek professional advice in that case).

• Capital losses: If the sale results in a capital loss – or if you have past year capital losses carried forward – be sure to apply those. Capital losses offset capital gains (they cannot reduce other income like salary). For example, if you sell one investment property at a $50,000 gain and another at a $20,000 loss in the same year, your net taxable gain is $30,000 (before any discounts). Always report the sale and let the losses offset the gains in your tax returnjenkinslegal.com.au. If losses exceed gains, the excess loss is carried forward to future years.

Other Tax Considerations for Property Sellers

Selling a property can have a few extra tax-related considerations beyond the basic CGT calculation. Make sure you also keep these in mind:

• Record Keeping: The ATO requires you to keep records of everything that affects your property’s cost base – purchase and sale contracts, receipts for improvements, legal fees, stamp duty, etc. – for at least 5 years after you sellato.gov.au. Good record-keeping ensures you claim the maximum allowable cost base and minimize your taxable gain. Missing paperwork (for example, failing to document a renovation expense) could mean paying more tax than necessary or even penalties if you can’t substantiate your claims.

• Timing and Planning: Because a capital gain is taxed in the year the contract is signed, consider the timing of your sale. If you’re on the cusp of a higher tax bracket, it might make sense to schedule the sale (if possible) in a financial year where your other income is lower (for instance, after retirement or a year off work) to reduce the tax impact. Also be mindful of the 12-month ownership rule for the CGT discountmacquariegs.com.au – selling even a few days too early can deny you the 50% discount. If you’re near the 12-month mark, check the dates carefully (remember: contract date to contract date mattersmacquariegs.com.au).

• Main residence nomination: If you own two properties (say you moved from one to another), plan which one to nominate as your main residence for CGT purposes. You generally have up to 6 months of overlap when moving to a new home where both can be treated as main residence (if you’re in the process of selling the old one) – beyond that, you must choose one. Consider factors like which property has grown more in value (thus a larger potential gain to exempt) and how long you expect to hold each. Only one property can get the exemption at a time, except for that limited overlap periodmacquariegs.com.au.

• Foreign resident considerations: If you are a non-resident for Australian tax at the time of selling a residential property, be aware that you cannot claim the main residence exemption (even if it was your home previously) due to law changes in recent yearsmacquariegs.com.au. Additionally, properties sold for over $750,000 are subject to a 12.5% withholding tax unless you obtain a clearance certificate from the ATO – this mostly affects foreign sellers, but Australian residents should always get the clearance certificate to avoid withholding by the purchaser. This is more of an administrative step, but it’s crucial to prevent delays in receiving your full sale proceeds.

• Getting professional advice: Property CGT can get complex, especially with partial exemptions, timing rules, and interactions with other taxes (for example, GST can apply to some property sales like new developments, though not typical for residential home sales). It’s often worthwhile to consult with an accountant or tax advisor before selling. They can help you estimate the potential CGT, explore strategies to reduce it (such as using the 6-year rule, or adjusting the sale timing, or ensuring all costs are accounted for), and ensure you meet all ATO requirements. Since the stakes are high – property sales involve large dollar amounts – a bit of tax planning can go a long way to avoiding surprises.

Examples: How CGT Works in Practice

To tie all these rules together, let’s look at a few simplified case studies of property sales and their CGT outcomes:

Example 1: Selling a Main Residence – No CGT

Sarah and Tom bought their house in 2010 for $500,000 and lived there as their primary residence for the entire 15 years until they sold it in 2025 for $800,000. They never rented out any part of it and didn’t use it for a home business – it was purely their family home. Because the property meets all the main residence exemption criteria (their home for the whole ownership period, no income-producing use, under 2 hectares)macquariegs.com.au, the $300,000 capital gain is completely tax-free. They do not need to pay any CGT or even report the sale in their tax returnsmacquariegs.com.au. This example shows how powerful the main residence exemption is – in effect, the profit from your home is yours to keep, with no tax consequences, if you satisfy the conditions.

Example 2: Partial Exemption – Renting Out After Moving (6-year rule)

Jake purchased a home in 2012 for $400,000 and lived in it as his main residence for 5 years. In 2017, he moved interstate for work and decided to rent out his house rather than sell it. He rents it from mid-2017 until mid-2025 (8 years of continuous rental). In 2025, he sells the property for $700,000. Let’s determine the CGT:

• First, Jake can apply the 6-year rule for the period his home was rentedmacquariegs.com.au. This allows him to treat the property as his main residence for up to 6 of the 8 rental years. He qualifies because it was originally his home and he didn’t nominate another main residence in the meantime. He uses the exemption for the first 6 years of the rental period, meaning those years will not count toward a taxable gain.

• However, Jake exceeded the 6-year limit by renting for 8 years. The extra 2 years (out of the 8) will attract CGT on a proportional basismacquariegs.com.au. Essentially, 75% of his rental period is exempt (6 out of 8 years) and 25% is taxable (2 out of 8 years).

• The ATO’s method to calculate this is to get the property’s market value at the time it first became income-producing (mid-2017)macquariegs.com.au. Suppose the house was worth $500,000 in 2017. That $500k becomes the cost base for the taxable portion. He sold for $700,000 in 2025, so the total gain over the rental period is $200,000 (from $500k to $700k). Now we apportion that gain: the last 2 years out of 8 years of rental (25% of the rental period) are taxable. Taxable gain = 25% of $200,000 = $50,000.

• Because Jake owned the property well over 12 months, he also gets the 50% CGT discount on the $50,000macquariegs.com.au. This cuts the taxable amount in half. After the discount, $25,000 is added to Jake’s assessable income for 2025.

In summary, even though Jake rented out his property for 8 years, the 6-year rule allowed him to escape tax on most of the gain. Out of a $300k total increase in value (from $400k purchase to $700k sale), only $25k ends up taxable, thanks to the main residence exemption and the CGT discount. (Had he rented it out for 6 years or less, he could have avoided CGT entirely on this sale under the 6-year rulemacquariegs.com.au.)

Example 3: Investment Property Sale – Taxable Gain

Lucy bought an investment apartment (never her personal home) in 2018 for $600,000. She incurred $20,000 in buying costs (stamp duty, legal fees) and over the years spent $30,000 on capital improvements (a kitchen renovation). She claimed $10,000 worth of capital works deductions for building depreciation during ownership. In 2025, she sells the property for $800,000, with $15,000 of selling costs (agent commission, etc.).

To calculate her capital gain:

1. Cost base: Start with purchase price $600k. Add $20k purchase costs and $30k improvements, and add $15k selling costs. This totals $665,000. But we must subtract the $10k of depreciation claimed (since those deductions are not allowed in the cost base)ato.gov.au. So the adjusted cost base is $655,000.

2. Capital gain: Sale price $800k minus cost base $655k = $145,000 gain.

3. CGT discount: Lucy owned the property ~7 years, so she qualifies for the 50% discount. Her taxable gain is therefore $72,500 (half of $145k).

This $72,500 will be added to Lucy’s income for the year. The exact tax will depend on her other income and tax bracket – for instance, if she’s in the 37% marginal tax bracket, the CGT on that gain would be roughly $26,000 extra tax. If Lucy had any prior capital losses (say from selling shares at a loss), she could use them to reduce the $145k gain before applying the 50% discount. Conversely, if the numbers were reversed and this sale resulted in a capital loss, she could carry that loss forward to offset future capital gains.

In all cases, preparation is key. Before selling, ensure you understand your property’s CGT position – whether you qualify for any exemptions or discounts, and how to minimize the taxable gain. By keeping good records, utilizing the main residence rules to your advantage, and consulting the ATO’s resources or a tax professional when in doubt, you can confidently navigate the sale of your property without unwelcome surprises from the tax office.