Understanding capital gains tax on investment properties

Jul 20, 2023 | by DiJones

Property investment can present lucrative opportunities for savvy investors, but it’s vital to understand the relevant tax implications for a successful property journey. One major consideration is Capital Gains Tax (CGT), which, in Australia, is payable on the profits made from selling off assets, including real estate.

Here, we explore the basics of CGT on investment properties and offer some valuable insights into maximizing tax benefits when it comes to buying and selling rental properties.

What is CGT?

In Australia, any profit you make from selling an asset, including property, is referred to as a capital gain and 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.

When it comes to property, your main residence is generally exempt from CGT, although there are some qualifications to that rule. For example, if you have used your main residence to produce an income, a proportion of the sale price may be subject to CGT. 

However, profits made from selling rental properties acquired after 20 September 1985 are usually considered capital gains and taxed accordingly.  

Considerations when buying an investment property

If you decide to acquire a property investment, it’s important to keep careful records of any related expenditure that may impact the amount of CGT you will be liable for when you decide to sell. 

When you buy, make sure you retain any records regarding the purchase of the property, including the purchase contract, evidence of stamp duty, legal fees, survey and valuation fees and the settlement statement. 

Throughout your ownership, you should also record the costs of any capital improvements and other expenses related to the property, such as interest, rates, land tax, insurance premiums, and repairs. 

Keeping meticulous records of these expenses and the costs related to selling a rental property is essential for reducing the overall capital gain and maximizing potential tax benefits.

Calculating CGT

Understanding how to accurately calculate your capital gain will save you any surprises when the time to sell does come. 

In the simplest terms, the capital gain on a property is calculated by subtracting the cost base (including the purchase price and any incidental related expenses) from the sale price. For example, if a property cost you $800,000 to purchase and you sell it for $1 million, the capital gain comes to $200,000 and this amount must be declared as part of your taxable income for the relevant financial year.

However, there are a few aspects that can reduce the taxable portion of a capital gain:

Capital losses:
If you have experienced capital losses from the sale of other assets, you can use them to offset your capital gains, minimizing your tax liability.

CGT discount: 
Holding a property for more than 12 months makes you eligible for a CGT discount. This discount allows individuals to apply a 50% reduction to their capital gains, effectively halving the taxable amount.

Partial exemptions: 
Depending on the circumstances, investors may qualify for partial CGT exemptions. For instance, if the property serves as a main residence but is also used for income-generating purposes, a proportionate CGT exemption may apply. 

Other deductions: 

Deductible expenses incurred during the sale, such as advertising costs, agent fees, and legal expenses, can be subtracted from the capital gains, further reducing the tax liability.


A few final words

Understanding CGT is crucial for property investors in Australia to make informed decisions, maximize tax benefits, and manage their tax obligations effectively. 

Whether you are buying an investment property or selling a rental property, being well-versed in the nuances of CGT is an essential step towards optimising your investment. 

Given the complexities of this tax and its impact on property transactions, seeking guidance from a qualified tax professional is highly recommended. They will provide personalized advice tailored to your specific circumstances and ensure you remain fully compliant with tax regulations while maximizing your tax benefits.

The Australian Tax Office provides useful tools to help you calculate your capital gains tax and work out if you are eligible for any exemptions.

Other buying, selling and investing articles and resources 

Guide to property investment success in NSW

Selling a house or apartment in NSW eBook

Buying a house or apartment in NSW eBook

Property investment in NSW FAQ’s

What is a property cycle and what drives a change? 

DiJones Real Estate, together with their directors, officers, employees and agents have used their best endeavours to ensure the information passed on in this document is accurate. However, you must make your own enquiries in relation to the information contained in this document and seek advice from your financial advisor, broker or accountant to ascertain its application to your circumstances.

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