If you’re planning on selling a property, it’s important to know the rules and regulations around Capital Gains Tax (CGT) so you can manage the sale as tax effectively as possible.
Take a look at our guide to all things related to CGT, and ways you can save money on your property sale.
What is Capital Gains Tax?
When you sell an asset such as real estate or shares, you’ll either make a profit or a loss on the sale. Capital Gains Tax is the tax that you’re liable to pay if you make a profit from an increase in the value of your asset between the time you bought it and the time you sell. CGT is collected by the Australian Government through the ATO.
When it comes to real estate, you typically only need to pay CGT on any property you own that is not your primary residence i.e. where you live most of the time. This means that, in most cases, your family home is exempt from CGT.
A property is usually considered to be your main residence if:
- You and your family live in it
- Your personal belongings are in it
- It is the address your mail is delivered to
- It is your address on the electoral roll, and
- Services such as phone, gas, and power are connected
Capital Gains Tax on investment property
Generally, you will be required to pay Capital Gains Tax on the sale of a property if that property isn’t your primary residence. This includes investment properties, holiday homes, and other properties you own that you don’t live in the majority of the time.
You may be eligible for a tax break if the property you’re selling was once your primary residence but is now being rented out. A property that was previously your primary residence may be exempt from CGT if it’s sold within six years of first being rented out. This exemption is only available where no other property is nominated as your main residence.
How much is Capital Gains Tax on real estate?
The amount of Capital Gains Tax you’ll need to pay depends on how much of a profit you make off the sale of your property, and expenses incurred relating to owning the property.
When selling an investment property, CGT is calculated based on the sale price of the property minus your expenses. Typical expenses include:
- Sale fees e.g. stamp duty, legal fees, real estate agent fees and advertising and marketing fees.
- Ownership costs e.g. rates, land tax, maintenance and interest on your home loan
- Renovation costs e.g. upgrading kitchens, bathrooms, and any other improvements you've made on the property
- Title costs e.g. legal fees associated with organising and defending your title on the property
Once you know your cost base (sale profits minus expenses), this figure is adjusted to account for:
- Any percentage of time when you owned the property that it was rented out and not your main place of residence.
- If you've owned the property for longer than 12 months – which entitles you to a 50% discount on CGT.
How to calculate capital gains on real estate
Calculating capital gains on real estate is relatively straightforward:
1. Calculate your cost base Purchase price + All costs - FHOG & claimed depreciation = Cost base
2. Subtract cost base from your property's sale price Sale price - cost base = Capital gain or loss
Example: You buy a two-bedroom investment property in October 1999 for $190,000. In 2018, you sell this property for $670,000. Your purchasing costs in 1999 were $1,500. Over the years of ownership, costs were $138,820, and the sale costs $30,000.
As such, your total capital gain is:
$670,000 - $190,000 - $1,500 - $138,820 - $30,000
There are three main methods of calculating Capital Gains Tax on real estate:
This method is applicable to people who have owned their property for more than 12 months. People using this method are entitled to a 50% discount on CGT for individuals, or a 33.3% discount on CGT for property owned by a super fund.
With this method, you minus the cost base from the capital proceeds and deduct capital losses, then reduce the amount by the discounted percentage.
The indexation method applies to people who bought their property before 21 September 1999. This method applies a multiplier to account for inflation on the cost base of your asset (up to September 1999).
This method is for people who have held an asset for less than 12 months. It’s the most basic way to calculate CGT, and simply involves subtracting the cost base from the sale price.
Regardless of which method is used to calculate CGT, the capital gains are included as part of your taxable income and taxed at your marginal rate.
A Capital Gains Tax calculator can help you work out how much CGT you might have to pay if you sell your investment property.
When to pay Capital Gains Tax on real estate
In Australia, your net capital gains form part of your taxable income. That means capital gains tax is payable as part of your income tax assessment for the relevant income year. With that in mind, it’s a good idea to account for CGT before filing your tax return in the year that you sold your property.
While avoiding CGT altogether might not be possible if you’re selling a property that isn’t your primary residence, you may still be eligible for an exemption in some circumstances.
- You bought the property before 1985 – Property is exempt from Capital Gains Tax if purchased before 20 September 1985.
- Your investment property becomes your main residence – If you decide to live in a property you bought as an investment, you'll be partially exempt from CGT. In this instance, CGT is calculated by comparing the number of days you lived in the property to the number of days you rented the property.
- Temporary absence – If you move out of your home and rent it out, the property is still treated as your principal residence for a period of up to six years, and is therefore exempt from CGT.
- Affordable housing – Property owners who invest in qualifying affordable housing are eligible for an additional 10% discount on CGT. To qualify, the investment property must be rented out at below market value and made available to tenants on low to moderate incomes.
There are a number of other circumstances in which you could be eligible for a partial or full CGT exemption, so it’s a good idea to talk to a professional tax specialist who can offer guidance on your specific situation.
Whether you’re selling your main home or an investment property, selling with Upside can make tracking costs easier because we cover the whole sales process within a single low-cost fee. Talk to one of our property agents to see how we can help with a cost-effective sale of your home.