How to Avoid Capital Gains Tax on Investment Property in 2025

Capital gains tax (CGT) is part of your income tax in Australia. It applies to the profit you make when you sell assets like investment properties that were purchased after 19 September 1985.

CGT is a common part of property investing. However, many owners are surprised to learn there are legal ways to reduce – or even eliminate – the tax burden associated with it.

In this article, we’ll delve into what capital gains tax is and legal strategies for minimising or avoiding it altogether.

What is capital gains tax (CGT)?

In Australia, any profit you make from selling an asset, including property, is referred to as a capital gain and is subject to taxation. Capital gains (or losses!) are reported on your income tax return and affect the amount of tax you are liable for at the end of each financial year.

This includes (but isn’t limited to) the sale of New South Wales investment properties.

CGT forms part of your income tax. When you sell an investment property for more than its purchase price, the difference (after costs have been deducted) may be added to your assessable income for that financial year.

To minimise your liability, it’s important to understand how CGT works and adopt a strategic approach. This will enable you to hold onto more of your property’s profits.

Let’s start with two common exemptions

If you've lived in your Sydney investment property before you rented it out, good news: You may qualify for valuable CGT exemptions.

However, your eligibility depends on two key regulations. These are the main residence exemption (MRE) and the six-year rule.

Main residence exemption (MRE)

The main residence exemption allows you to avoid capital gains tax if the property you're selling was your principal place of residence (PPOR).

To qualify for the MRE, you need to demonstrate that:

• You lived in the property for the full period you owned it.
• Your personal belongings were kept there.
• Your mail and utilities were registered to the address.
• You were enrolled to vote at that location.

If you can prove you met these criteria, you may be exempt from having to pay CGT on your property sale.

Putting it into context

Let’s say that you bought a house with your partner. You’ve lived in it for the full period that you’ve owned it, but eventually you decide to sell. (Perhaps your children have left home and you’re downsizing, or you want to move to another city.) Hopefully, your house has appreciated in value during the time you’ve lived in it, which means that you may be able to sell for a profit.

You may be eligible to avoid CGT under the MRE exemption. This is because the property you're selling was (demonstrably) your principal place of residence.

Six-year rule

This provision allows you to treat a former main residence as your principal place of residence for CGT purposes for up to six years while it’s rented out. (It’s often referred to as the six-year absence rule.)

During this time, if you sell the property, you may avoid paying capital gains tax entirely. However, to qualify, you must have lived in the home before renting it.

Additionally, you can’t claim another principal place of residence during the same period. The exception is a six-month overlap when moving. That said, if the property is not rented out, the exemption can continue indefinitely.

Putting it into context

Suppose you bought a townhouse and lived in it for three years before moving overseas. Then you proceeded to rent it out for four years before selling it.

In such circumstances, you may be eligible to avoid CGT under the six-year rule. That is because you used the townhouse as your main residence initially, and sold it within a six-year period after that.

How to claim your 50% CGT discount

The easiest way to reduce the amount of capital gains tax you have to pay on an investment property is by claiming the 50% CGT discount.

As its name suggests, you will only be taxed for half of your capital gain, provided you meet the eligibility criteria.

Who is eligible?

Individual Australian residents and trusts can qualify for the CGT discount if they have held the property for at least 12 months from the date the contract was signed.

How the discount reduces your tax

If you are an eligible investor, then you only need to include 50% of the capital gain in your assessable income. Therefore, if you make a $100,000 gain, only $50,000 of it is taxable.

By contrast, those with self-managed super funds (SMSFs) get a reduced 33.33% discount. Companies, at present, are not eligible for any CGT discount at all.

Common exclusions

The 50% CGT discount can save you a substantial amount of money in tax. However, it does not apply to everyone. Under current legislation, you are ineligible for it if:

• You’re a foreign resident.
• The asset was first used for income for less than 12 months before a sale.
• You created a new asset (e.g. subdivision).

If in doubt as to whether you qualify, it might be worth contacting a registered accountant or tax advisor for clarification and peace of mind.

Offset capital gains with capital losses

If you’ve sold other assets (like shares or property) at a loss, you can use those capital losses to reduce the capital gains on your investment property.

That said, losses can only offset capital gains. They cannot be used against any other type of assessable income. However, unused losses can be carried forward indefinitely. This means you can apply them to future capital gains.

For example, imagine you sold a tenanted investment property and made a $100,000 gain on it. However, earlier in the year, you also made a $40,000 loss selling some shares. In this scenario, you can reduce the taxable gain to $60,000. Doing this will help you minimise his CGT.

This is a simple and effective strategy for reducing your taxable capital gain. It can be especially useful if you intend to sell multiple assets over time.

Maximise your property’s cost base to reduce CGT

You might not be aware of this, but the cost base of your property directly impacts the size of your capital gain. Essentially, the higher the cost base, the lower the taxable gain.

Key inclusions and expenses

There are several things you can absorb within your initial cost base. They include:

• Purchase price
• Stamp duty
• Legal fees (for buying and selling)
• Buyer’s agent fees
• Real estate agent commissions
• Capital improvements (major renovations, structural work, etc.)

It is important to be aware that routine maintenance (like painting or plumbing repairs) is not included in your cost base.

The importance of records

For any claim you make on costs, it is essential to support it with detailed and official records. These can take the form of invoices, receipts, and contracts that prove your claim is genuine.

It is important to keep records because it can save you a tidy sum of money. For instance, imagine you buy an investment property for $720,000 and spend $80,000 on structural renovations. Your cost base will be $800,000.

Therefore, if you later sold the property for $850,000, you would only pay CGT on $50,000 and not $130,000.

Strategic timing: When and how to sell for lower CGT

Another savvy way to reduce how much CGT you pay is to strategically time your property sale. More specifically, coincide your property sale with certain tax events.

Here are some noteworthy opportunities to look out for.

Contract date vs settlement date

The CGT event is triggered on the contract date, not the settlement date. Subsequently, it is this starting time that determines the financial year in which the gain must be declared.

When to consider selling

You can, of course, sell your investment property whenever you like. However, a good time to do this is during a year when you anticipate receiving a lower income.

For instance, this could be if you are enjoying an extended career break, taking parental leave, or planning to retire. Selling during this period can significantly reduce your marginal tax rate and result in lower CGT.

Here’s a scenario to consider. Let’s say you retire on 1st July. This means you will have much less income for the rest of the financial year than you otherwise would if you were working.

Subsequently, if you sold your property before 30th June, you would substantially reduce your capital gains taxes. In addition, if you have lived in the property for at least 12 months, it could also help you to qualify for the 50% CGT discount.

Advanced strategies to reduce CGT: SMSFs, trusts, and other concessions

If you are a more seasoned property investor, there are some advanced structures and strategies that may offer further ways to minimise the amount of CGT you have to pay.

Self-managed super funds (SMSFs)

Properties held in an SMSF are taxed at 15% in the accumulation phase. That figure drops to 0% in the pension phase. Subsequently, this structure can markedly reduce the amount of CGT you have to pay.

However, as SMSFs are highly regulated, it would be worth doing so only with the advice and assistance of an experienced, qualified accountant.

Trust structures

Trusts may provide you with some flexibility in distributing gains to lower-income beneficiaries. Therefore, they can be beneficial in reducing your CGT.

However, trust rules are extremely complex. They also require the services of an expert to set up and manage it.

Small business CGT concessions

If the property is an active asset that is used in a business, small business owners may access some CGT concessions. They include the 15-year exemption or 50% active asset reduction.

It is important to note that they do not apply to passive investment properties. They also have strict criteria that need to be followed.

Affordable housing discount

If you are a property owner who provides eligible affordable rental housing through a registered community housing provider, you may be entitled to a further 10% CGT discount. This will raise the total discount you are eligible for to up to 60%.

Let’s wrap up

So - it is entirely possible to reduce the amount of capital gains tax you have to pay on an investment property.

However, you will need to employ smart, legal strategies, such as taking advantage of the Main Residence Exemption and the six-year rule and claiming the 50% CGT discount. It is also a good idea to maximise your cost base and time your sale carefully.

CGT rules are complex and subject to change. It’s important to engage the services of a qualified Australian tax accountant or financial advisor to ensure you maximise your return while remaining compliant.

However, before you can pay CGT, you must sell your investment property, and that is where our experience comes in. Get in touch with our expert team. We’ll help you every step of the way.

FAQs

Do I have to pay CGT when selling my investment property?

CGT applies when you sell an investment property for more than your purchase price. However, in some cases, you may be eligible for capital gains tax exemptions or discounts. This will depend on how long you owned the property and how it was used. To find out more, visit the ATO’s guide to CGT and property.

What’s the difference between a capital gain and a capital loss?

A capital gain is when you sell an asset for more than its cost base. A capital loss happens when you sell it for less. You can use capital losses to reduce your capital gain. This will help you minimise CGT.

Can foreign residents claim CGT discounts or exemptions?

Foreign residents are typically not eligible for the 50% CGT discount or residence exemption. However, some special rules may apply. Therefore, it’s important to seek the advice of a qualified tax professional.

Are there any tax exemptions for partial property use?

You may be partially exempt from CGT if the property was your primary place of residence for part of the ownership period. (Tip: Use the ATO Capital Gains Tax calculator to help estimate your tax.)