How to avoid capital gains tax (CGT) when selling a property

A capital loss happens when you sell an asset for less than you paid for it.

CGT can be complex and there many nuances to how it applies, so you should always seek professional advice on whether – and how much – you need to pay it. However, this guide provides some basic information to help you understand how CGT works in Australia.

Importantly, CGT does not apply to any asset you bought or owned before 20 September 1985.

How to avoid capital gains tax on your property

You can often avoid or minimise CGT through concessions and exemptions. There are also several legitimate strategies you can use to reduce your overall tax bill.

Common strategies to avoid paying CGT, include:

1. Main residence exemption
2. Temporary absence rule
3. Investing in superannuation
4. Timing capital gain or loss
5. Partial exemptions

We provide an overview of each of these below. Make sure you consult your accountant or other tax professional before attempting any of them.

1. Use the main residence exemption

Your home is usually not subject to CGT.

To be eligible for this exemption, your home must be your main residence (you can only have one main residence). You also can’t use the property to produce any other form of income.

If you do – for instance, if you rent out a room or run a business from the same premises – that portion will attract CGT.

2. Use the temporary absence rule

The temporary absence rule lets you treat a former home as your main residence for CGT purposes.

Under the temporary absence rule, you can continue to treat your former home as your main residence:

• For up to six years if you rent it out and earn an income, or
• Indefinitely, if you make no income from it.

If you rent the property out and move back into it, the six-year period is reset.

Also, because you can only have one main residence, you can’t also claim a CGT exemption for your current home if you invoke the temporary absence rule to claim a former one.

3. Invest in superannuation

Self-managed super funds receive a one-third (33%) discount for CGT. They also generally pay a standard tax rate of 15%. When these are combined, the standard rate of CGT a super fund pays works out at just 10%.

For instance, say your super fund sells a property and makes a capital gain of $60,000; the one-third discount means CGT will be calculated on $40,000. The super tax rate of 15% will then be applied to this, so that you pay just $6,000 in CGT.

If you start a full retirement pension through your SMSF from the assets of the fund, your effective rate falls to zero. That’s because gains and income are tax-free in the pension phase.

4. Get the timing of your capital gain or loss right

When you sell a property can impact exactly how much CGT you’ll pay. That’s because CGT is calculated at your marginal income tax rate based on the financial year in which you sell it.

If you know your income will be lower next financial year compared with this one, you could choose to delay selling and potentially reduce the amount of CGT you’ll need to pay.

5. Consider partial exemptions

You generally receive a 50% discount on CGT when you hold any asset – including a property – for more than12 months.

So, if you’ve held an investment property for more than a year, and you make a capital gain of $100,000 when you sell, CGT will only be calculated on $50,000.

Other partial CGT exemptions include:

• An entitlement to a CGT reduction if your home and business are in the same premises. The exact amount will be based on the portion you use as your main residence.
• A 60 per cent reduction in CGT for investing in affordable housing that meets certain criteria.
• The ability to offset any capital losses against capital gains.

Again, you should always consult your accountant or tax professional before claiming any of these partial exemptions.

When do you have to pay capital gains tax on a property?

You usually pay CGT on a property when you sell it, not when you own it.

The general rule is that capital gains tax (CGT) applies whenever you sell an asset for a profit. However, as we’ve shown above, there are exceptions.

As we mentioned, CGT also does not apply to any asset you bought or owned before 20 September 1985.

How are capital gains calculated on property?

Gross capital gain is defined as the sale price, minus the purchase price and associated costs. To calculate your capital gain, subtract the price you paid for the property (and associated costs such as legal fees and stamp duty) from the price you sold it for.

If you’ve held your property for more than 12 months, you’ll generally receive a 50 per cent discount. However, there are some exceptions:

• Companies generally don’t receive any CGT discount
• Foreign residents don’t receive a CGT discount if they bought their property after 8 May 2012
• Self-managed super funds receive only a one-third discount.

How much is capital gains tax in Australia

CGT is calculated at your marginal tax rate. That means, the higher your income, generally the more CGT you’re likely to have to pay.

For instance, if your income is $80,000 and you also make a capital gain of $50,000, you’ll pay CGT of $8,000. However, if your income is $200,000 and you also make a capital gain of $50,000, you’ll pay CGT of $11,750.

Does CGT apply on inherited properties?

No, generally capital gains tax does not apply to inherited properties. However, it may apply once this property is sold if it’s not your main residence.

Does CGT apply if you transfer or gift a property? 

You may have to pay CGT when you gift property, unless it was your main residence. The relevant amount the property will be assessed on is the market value and not the amount you may have gifted it for.

However, you may receive a full exemption in certain circumstances, such as where a partnership breaks down and the property is being transferred to a former spouse.