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Capital Gains Tax Explained for Landlords

Understanding how CGT works, when it applies, and strategies to minimize your tax liability when selling investment properties.

What is Capital Gains Tax (CGT)?

Capital gains tax (CGT) is a tax on the profit you make when you sell an asset for more than you paid for it. For landlords, this typically applies when selling an investment property.

CGT is not a separate tax – it's part of your income tax. The capital gain is added to your assessable income and taxed at your marginal tax rate.

Example:
Purchase price: $500,000
Sale price: $750,000
Capital gain: $250,000

After 50% CGT discount (held >12 months): $125,000 added to your taxable income

When Does CGT Apply?

CGT Applies When You:

  • Sell an investment property
  • Gift a property (deemed sale at market value)
  • Transfer property to a trust or company
  • Convert your home into a rental property (partial CGT on future gains)

CGT Does not Apply When:

  • Your main residence (primary place of residence exemption)
  • Assets acquired before 20 September 1985
  • Cars, motorcycles, and personal use assets under $10,000

How to Calculate Capital Gains Tax

Step 1: Calculate the Capital Gain

Capital Gain = Sale Price - Cost Base

Step 2: Determine Your Cost Base

Your cost base includes:

  • Purchase price
  • Stamp duty and conveyancing fees
  • Capital improvements (renovations, extensions) less any capital works depreciation already claimed
  • Costs of buying and selling (legal fees, agent commissions)

Your cost base does not include:

  • Repairs and maintenance (already deducted as expenses)
  • Loan interest (already deducted as expenses)
  • Council rates and insurance (already deducted as expenses)
  • Depreciation claimed (reduces your cost base – see below)

Important: Impact of Depreciation on Cost Base

Any depreciation you claimed on capital works (at 2.5%/year) or plant & equipment (at effective life rates) reduces your cost base when you sell, which increases your capital gain.

  • Depreciation you have claimed: This reduces your cost base dollar-for-dollar. For example, if you claimed $40,000 in depreciation, your cost base reduces by $40,000, increasing your capital gain by $40,000.
  • Remaining depreciation (not yet claimed): You cannot claim this in your cost base calculation or as a deduction after you sell. Once you dispose of the property, you can no longer claim depreciation on it – the remaining unused life is simply lost.
Important: Depreciation claimed increases your capital gain dollar-for-dollar. This is why tracking depreciation carefully is critical for CGT planning.

Step 3: Apply the 50% CGT Discount

If you held the property for more than 12 months, you qualify for a 50% CGT discount:

Discounted Capital Gain = Capital Gain × 50%

Example - Cost Base Calculation:

Purchase price: $600,000
Stamp duty & conveyancing: +$30,000
Capital improvements (renovations): +$50,000
Less: Capital works depreciation claimed: −$40,000
Total cost base: $640,000

Calculate the gain:
Sale price: $900,000
Less selling costs (agent/legal): −$30,000
Less cost base: −$640,000
Capital gain (before discount): $230,000

Apply 50% CGT discount (held >12 months):
$230,000 × 50% = $115,000 added to your taxable income

Step 4: Pay Tax at Your Marginal Rate

The discounted capital gain is added to your taxable income and taxed at your marginal tax rate:

Example (continued):
Discounted capital gain: $115,000
Marginal tax rate: 37%

CGT payable: $115,000 × 37% = $42,550

The 50% CGT Discount

To qualify for the 50% CGT discount, you must:

  • Hold the property for at least 12 months (from settlement to settlement)
  • Be an Australian resident for tax purposes
  • Be an individual or trust (companies and super funds have different rules)

Mint's Fresh Take

The 12-month holding period is measured from the settlement date when you purchased to the settlement date when you sold – not contract dates. Ensure you hold for slightly over 12 months to guarantee the discount.

Main Residence Exemption

Your primary residence (main home) is generally CGT-exempt if:

  • You lived in it as your main residence
  • The land is 2 hectares or less
  • You didn't use it to produce income (e.g., renting out)

What if Your Property Exceeds 2 Hectares?

If your main residence is on more than 2 hectares of land, the main residence exemption still applies, but only to a portion of the property. The ATO will apportion the capital gain based on:

  • The dwelling and curtilage (garden/immediate surrounds): Up to 2 hectares. This part is CGT-exempt.
  • Land beyond 2 hectares: Any excess land beyond 2 hectares is treated as a separate CGT asset. Capital gains on the excess land are taxable.
Example: Your main residence sits on 5 hectares. You can claim the main residence exemption on 2 hectares (the house and gardens), but if the property value increases by $500,000 over 10 years, some of that gain attributable to the 3-hectare excess may be subject to CGT. Consult a tax advisor about how to apportion gains between exempt and taxable portions.

Partial Exemption for Rentals

If you rented out your home for part of the ownership period, you get a partial CGT exemption based on:

  • The proportion of time it was your main residence vs rental
  • The proportion of the property used for income (e.g., a granny flat)
Example:
Owned for 10 years, lived in it for 7 years, rented for 3 years.
CGT exemption: 70% of the capital gain
CGT payable: 30% of the capital gain (after 50% discount if held >12 months)

The 6-Year Absence Rule

If you move out of your main residence and rent it out, you can treat it as your main residence for up to 6 years while it's rented – making the capital gain CGT-exempt.

Conditions:

  • The property was your main residence before you moved out
  • You don't claim another property as your main residence during this period
  • The 6-year period starts when you move out and begin renting it

Mint Tip

The 6-year rule is one of the most powerful CGT exemptions. If you sell within 6 years of moving out, the entire capital gain can be CGT-exempt.

Learn more: Rent your property for 6 years and don't pay CGT

Strategies to Minimize CGT

Hold for More Than 12 Months

Ensure you qualify for the 50% CGT discount by holding the property for at least 12 months. This alone could save you thousands in tax.

Maximize Your Cost Base

Keep detailed records of all capital improvements (renovations, extensions) to add to your cost base and reduce your capital gain.

Time the Sale

Sell in a financial year when your income is lower (e.g., after retirement or during a career break) to reduce your marginal tax rate on the gain.

Use the 6-Year Absence Rule

If you move out of your home and rent it, sell within 6 years to potentially avoid CGT entirely when applicable.

Offset Capital Losses

Capital losses from other investments can offset capital gains from property sales, reducing your CGT liability significantly.

Claim All Eligible Costs

Include selling costs (agent commissions, legal fees, advertising) in your cost base to reduce the capital gain amount.

Use the CGT Calculator

Unsure about your exact CGT liability? Try Mint's CGT calculation tool to estimate your tax based on your property details, holding period, and expected sale price.

Record Keeping for CGT

The ATO requires you to keep records for 5 years after you dispose of the asset:

  • Purchase contract and settlement statement
  • Stamp duty and conveyancing receipts
  • Invoices for all capital improvements
  • Depreciation schedules and claims
  • Sale contract and settlement statement
  • Agent commission and legal fee invoices

Mint Property Mate Advantage

Mint automatically tracks your cost base, capital improvements, and depreciation claims – generating a CGT-ready report when you sell.

Common Mistakes to Avoid

  • Not tracking capital improvements: Missing out on cost base additions that reduce CGT.
  • Forgetting depreciation reduces cost base: Depreciation claimed increases your capital gain.
  • Selling before 12 months: Losing the 50% CGT discount.
  • Not using the 6-year rule: Paying CGT unnecessarily on a former main residence.
  • Poor record keeping: Without documentation, you can't substantiate your cost base.
  • Not planning the sale timing: Selling in a high-income year maximizes your CGT liability.

Mint's Takeaway

  • CGT is tax on the profit from selling an investment property, added to your taxable income.
  • Capital Gain = Sale Price - Cost Base (including improvements, stamp duty, selling costs).
  • Holding for >12 months qualifies you for a 50% CGT discount.
  • Main residences are CGT-exempt; rental properties are not.
  • The 6-year absence rule allows you to rent out your former home and still claim the main residence exemption.
  • Depreciation claimed reduces your cost base and increases your capital gain.
  • Keep meticulous records of all costs, improvements, and depreciation for at least 5 years after sale.

Mint automates cost base tracking, depreciation records, and CGT calculations – ensuring you pay the minimum tax legally required.

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