Capital gains tax: A guide for property investors

Capital Gains Tax was introduced in Australia in 1985 and applies to assets you sell that were bought since that date (though there are some exceptions). Importantly, capital gains tax is part of your income tax and not a standalone tax as the name might suggest.

But how is capital gains tax calculated when you sell your investment property? And are there any ways to lower the amount of capital gains tax you pay?

Note: Always consult a tax professional to get insights in your situation. 

Put simply, a capital gain or capital loss is the difference between what you paid for an asset (its cost base) and how much you received when you sold it.

If you make a capital gain, it will be added to your assessable income and you would pay tax on it like you would any other income you’ve received for that year.

If you incur a capital loss, you won’t be able to claim it against your ordinary income, but it can be used to offset the amount of tax you pay on any capital gains.

Whether you make a capital gain or loss, it should be recorded in the financial year you entered into the contract to sell it: not when you settled.

That means if you sign a contract to sell an investment property in May 2024 but settle a few months later in July, the gain or loss will have to be reported in your 2023-2024 tax return.

The Australian Tax Office (ATO) explains that all assets acquired since capital gains tax was introduced on 20 September 1985, are subject to capital gains tax unless specifically exempted.

Assets liable for the capital gains tax include:

• Real estate.
• Cryptocurrency.
• Shares, units and similar investments.
• Leases, goodwill, licences, foreign currency, contractual rights, and major capital improvements made to land or pre-CGT assets.
• Personal use assets acquired for more than $10,000.
• Collectables acquired for more than $500, or worth more than $500 when acquired.

Some assets are exempt from capital gains tax, meaning any capital gains won’t have to be included in your assessable income. By the same token, any capital losses on these assets cannot be used to offset any capital gains.

Capital gains tax exemptions can include:

• Your main residence (though there are some exceptions).
• Cars or motorcycles.
• Personal use assets acquired for less than $10,000.
• Collectables acquired for $500 or less, or worth $500 or less when acquired.
• Depreciating assets (such as fittings in a rental property) used solely for taxable purposes.
• Any asset acquired before 20 September 1985.

If you sell or dispose of any capital gains tax assets within 12 months of buying them, your net capital gain will be added to your assessable income and taxed accordingly. 

But if you’ve held those assets for longer than 12 months, you can pick from two methods for calculating capital gains tax. So long as you’re eligible, you can select the one which produces the most favourable outcome. They are:

1. CGT discount method

The discount method applies a 50% discount to your capital gain. That means if a property you’ve owned for more than 12 months sells for $100,000 more than you paid for it, only half of the net capital gain ($50,000) will be added to your taxable income.

There are some exceptions to the 12-month requirement, such as if a capital gains tax asset is bequeathed to you by a deceased person. In this case, you can use the discount method if the deceased acquired the asset after 19 September 1985 and at least 12 months before you sell it.

And if a capital gains tax asset is acquired following a marriage or relationship breakdown, the 12-month requirement is satisfied so long as you and your spouse owned the property for more than 12 months when you were together.

2. Indexation method

If you acquired a capital gains tax asset before 21 September 1999, you can use the indexation method to calculate how much tax you are liable to pay. 

This method takes your cost base and applies an indexation factor, which is worked out using the consumer price index (CPI). This will convert the amount you originally paid for your asset into today’s money.

A list of CPI rates dating back to 1985 can be found on the ATO website.

The ATO explains that if a capital gains tax event (the point at which you sell an asset) happened on or after 21 September 1999, you’re only allowed to index the elements of your cost base up to 30 September 1999. 

So to get your indexation factor, you have to take the CPI for the quarter ending 30 September 1999 and divide it by the CPI at the time you purchased the asset.

Once you have the indexation factor (rounded to three decimal places), multiply it by the initial cost of your capital gains tax asset. This will give you the inflation-adjusted purchase price, which you then subtract from the amount the asset sold for.

This can be a little bit confusing, so let’s provide an example. Say you purchased an investment property in June 1994 for $400,000 (including associated buying costs) and sold it in September 2018 for $1 million.

To work out your indexation factor, take the CPI in the third quarter of 1999 (which is 68.7) and divide it by the CPI in the quarter that you purchased the property (which is 61.9). This will give you 1.110 when rounded to three decimal places.

68.7 ÷ 61.9 = 1.110

Next, you have to multiply the cost of the property ($400,000) by 1.110. This will give you $440,000, which is your property’s cost base adjusted for inflation. 

400,000 x 1.110 = 440,000

Finally, you’ll have to subtract this amount from $1 million, which is the amount you sold the property for. Your capital gain then comes to $560,000, which is then added to your assessable income for the 2019-19 income year.

1,000,000 - 440,000 = 560,000

A capital loss occurs when you sell an asset for less than you initially paid for it. Capital losses can be deducted from any capital gains you’ve made, allowing you to reduce the amount you pay in tax.

If you haven’t made any capital gains that income year, you'll be able to carry your losses over to future years. For this reason, it’s a good idea to keep records, such as initial sale contracts and receipts for other expenses.

Unfortunately, you cannot use a capital loss to offset tax on other income. So if a property sale results in a capital loss of $20,000, you won’t be able to subtract $20,000 from your assessable income.

If you have a capital gains tax liability, such as an investment property, there are a few things you can do to minimise the amount of tax you have to pay. We’ve listed just a few below, but for personalised advice, it’s a good idea to talk to a tax accountant.

Hold onto it for at least 12 months

As mentioned above, if you hold onto a property for 12 months or more, you can receive discounts on your capital gain. You can do this by applying either (1) the CGT discount method, or (2) the indexation method.

Sell during a low income year 

If you are able to delay the sale of a property and you know your regular income will be lower next financial year, timing the two so they coincide can result in a lower marginal tax rate, meaning less paid in CGT.

Keep track of expenses

Make sure to keep detailed and accurate records of all your property-related expenses from day one. This includes initial sale contracts, valuations and interest paid on related borrowings.

Any costs associated with acquiring, holding and disposing of a property (think stamp duty, renovation costs and solicitor’s fees) can be added to the cost base and used to offset your capital gain.