Minimising Capital Gains Tax on investment property guide

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Reducing your Capital Gains Tax through exemptions and discounts

Reducing your Capital Gains Tax liability (CGT) is possible with proper planning and by using things like exemptions and tax deductions.

Here are key strategies to help you lower the amount you pay when selling your investment property:

Property ownership duration and CGT discounts

If you’ve owned your investment property for more than a year as calculated from the contract date not the settlement date, you may qualify for the 50% Capital Gains Tax (CGT) discount. This significantly reduces your taxable capital gain and your overall Capital Gains Tax (CGT) liability. Carefully timing your sale to align with this threshold can make a big difference in the tax you pay.

Natural persons and trusts are eligible for the 50% discount. SMSFs get a 33% discount, however companies which own CGT assets such as land and buildings do not qualify for the CGT discount.

Main residence CGT exemption rules

Properties that were once your main residence may qualify for partial or full exemptions from Capital Gains Tax (CGT). This can apply if you previously lived in the property before renting it out within a six year period. Read our article How the “6-Year Rule” can reduce your Capital Gains Tax (CGT) to learn more. The Australian Taxation Office recognises this exemption, making it a valuable way to avoid Capital Gains Tax (CGT) on properties with dual purposes.

The six-year absence rule

If you rented out your former primary residence, you could claim a Capital Gains Tax (CGT) exemption for up to six years after moving out. Selling the property within this timeframe allows you to offset or eliminate CGT. This rule helps reduce tax liability on rental income properties used for temporary investment purposes. To learn more about how the six year rule works, read our article How the “6-Year Rule” can reduce your Capital Gains Tax (CGT).

Property cost base calculations

To minimise your taxable capital gain, include all allowable expenses in your property’s cost base. Items like legal fees, stamp duty, renovation costs, and sale costs lower the total net capital gain. Properly calculating these figures ensures you don’t overpay on your Capital Gains Tax (CGT) property obligations.

How to maximise your property’s cost base

Lowering your tax bill when selling property starts with knowing which expenses count toward your property’s total value. Adding these costs to your purchase price can significantly reduce the tax you’ll owe on your investment property sale.

Different types of expenses qualify and can help lower your tax when selling. Each qualifying cost you track and document helps maximise your tax benefits.

Costs you can add to your property’s tax base

Improvements

Upgrades like new kitchens, home extensions, or structural changes that make your property more valuable or last longer.

Legal fees

Essential costs when buying or selling, such as conveyancing fees needed to transfer ownership.

Advertising costs

Money spent marketing your property for sale, including your advertising campaigns and sales materials.

Agent’s commissions

Fees you pay real estate agents whether buying or selling the property.

Stamp duty

Property transfer tax paid during purchase – a major cost you can include.

Repairs and maintenance

While regular upkeep doesn’t count, big improvements or major repairs that boost your property’s value may qualify.

How a capital gains report can save you tax money

A capital gains reduction report, also known as a quantity surveyor’s report, provides a detailed review of your eligible costs to help minimise your tax and maximise your deductions when selling property.

Comprehensive cost review

List every allowable expense to ensure you claim all possible deductions.

Tax planning

Cost adjustments can help you time your property sale for better tax outcomes.

Audit protection

Ensure you meet the Australian Tax Office’s standards, giving you confidence during tax reviews or audits.

Which tax strategy suits your investment property?

Choosing the right Capital Gains Tax (CGT) approach affects your investment property’s tax outcome. Your personal situation and investment goals shape which method will deliver the best results.

Main residence exemption

This strategy eliminates your Capital Gains Tax when you sell a property that served as your primary residence. It works particularly well if you lived in the property before converting it to a rental. However, you can only claim this exemption for one property at a time, and you’ll need evidence like utility bills to prove it was your main home.

Six-year rule

You can keep your CGT exemption for up to six years while earning rental income from your former main residence. This suits temporary moves or shorter-term investment plans. Keep in mind that claiming another property as your primary residence during this period cancels the exemption on your rental.

50% CGT discount

By holding your investment property for over 12 months, you can halve your taxable capital gain. While this common strategy offers significant savings, remember that your marginal tax rate still applies to the remaining 50% of your capital gain, affecting your final CGT liability.

Steps on how to calculate Capital Gains Tax

You can work out your Capital Gains Tax (CGT) by following a clear process.

Here are the key steps to determine what you’ll need to pay:

Find your capital proceeds

Work out what you received from the property sale or CGT event. For properties sold below market value or given away, use the current market value as your proceeds.

Work out your cost base

Add up your property’s purchase price plus capital expenses, legal fees, stamp duty, and eligible maintenance costs. For properties bought before September 21, 1999, you can use indexed cost base instead of the CGT discount.

Calculate your gain or loss

Subtract your cost base from your capital proceeds. A higher sale price means a capital gain, while a lower one creates a capital loss.

Total all CGT events

Add up gains and losses from all your CGT events in the financial year.

Use your capital losses

Take away any capital losses from your gains. Start with carried-forward losses, using them first against gains that don’t qualify for CGT discounts.

Check your CGT discounts

For assets owned over 12 months, you might get a 50% CGT discount (individuals and trusts) or different rates for Self-Managed Super Funds. Remember, you can’t use both indexation and discounts.

Complete your tax return

Include your net capital gain or loss in your income tax return. You’ll pay tax on gains at your marginal tax rate, while losses can reduce future capital gains.

The Australian Tax Office’s Capital Gains Tax calculator on myGov can help ensure your calculations meet Australian Taxation Office requirements.

TMS Financials provides you with a team of experienced professionals that help you achieve your financial goals through smart tax structures and strategic financial structuring. We’re a one-stop shop for all financial needs and pride ourselves on building strong partnerships with our clients.

Book a free financial health review to see the difference we can make in your financial future.

This outline is for general information only and not as legal, tax or accounting advice. It may not be accurate, complete or current. It is not official and not from a government institution. Always consult a qualified professional for specific advice tailored to your unique circumstances.