As the saying goes, 'only two things are certain in life; death and taxes'. If you're planning to sell a property you might soon face the latter, in the form of capital gains tax.
Capital gains tax, often abbreviated as CGT, is charged on the profits realised on the sale of an asset. It means that if you sell a property for more than you bought it, you'll likely pay tax on the difference.
Capital gains tax is often misunderstood, however, and there are multiple discounts you might be able to lean on to minimise your CGT liability.
What is capital gains tax?
Let's break capital gains tax down into its components.
Capital gain
A capital gain occurs when an asset is sold for more than its purchase price, resulting in a profit. Conversely, if the asset is sold for less than its original purchase price, a capital loss is incurred.
In Australia, when a person realises a capital gain, they must pay tax on the profit realised.
That is, unless they purchased the asset prior to CGT being introduced in mid-1985 and the asset hasn't been substantially changed since.
What is the tax rate on capital gains?
So, what is the capital gains tax rate in Australia?
A common misconception is that capital gains tax is a separate tax with its own specific rate. In reality, capital gains are added to a person's income for the tax year and taxed at their marginal tax rate.
Selling a property? Get an estimate of your CGT liability: Capital gains tax calculator
Marginal tax rates for the 2024-25 financial year are as follows:
| Income realised | Tax rate in FY24-25 |
|---|---|
| Up to $18,200 | Nil |
| $18,201 - $45,000 | 19% |
| $45,001 - $200,000 | 30% |
| Above $200,000 | 45% |
Follow these steps to calculate how much of your capital gains might be subject to tax in any given financial year:
-
Work out your total capital gains for the year
-
Deduct any capital losses
Including any capital losses from previous years (more on that below) -
Deduct any CGT discounts or concessions you're entitled to
-
The resulting sum is your net capital gain subject to tax
Capital gains tax: An example
Let's illustrate how capital gains tax might be applied in the case of a property sale:
Peter bought his first investment property for $420,000 right before a major market boom. Having realised substantial equity growth, he decides to sell the property just eight months later for $550,000.
Image by Irene Strong on Unsplash
Peter will have realised a $130,000 capital gain from the sale. When added to his other income, he will have earned $200,000 in the financial year 2024-25.
After deducting his transaction costs ($16,500 in real estate fees, $13,125 in stamp duty, and $2,000 in other costs), Peter will be left with a taxable income of $168,375.
He will be liable to pay $43,637 of income tax in the financial year 2024-25 – $11,788 on to his regular income and $33,816 on his capital gain.
Capital gains tax discounts
Unfortunately for Peter, he couldn't access any common capital gains discounts. You might have more luck, however.
There are three common CGT discounts property owners might be able to make the most of:
1. If you've held an asset for 12 months or more
If you've held an asset for at least a year, you could receive a 50% discount on your capital gains tax liability – meaning you'll only be taxed on half of your profit.
2. If you're selling your home
Generally, any profit realised on the sale of a person's primary residence is exempt from capital gains tax. So, if your home is worth more now than it was when you bought it, you'll likely be able to keep the entirety of the difference when you sell it.
3. The six-year rule
If you move out of your primary residence and rent it out for six years or less, you can still claim the primary residence capital gains tax (CGT) exemption, as long as you don't own another home that's used as your main residence during that period.
If the property isn't rented out, it can remain your primary residence indefinitely, provided you don't buy another home to use as your main residence.
Offsetting capital gains tax with past losses
If you're an avid investor who has made some losses in the past, you might be able to use those previous losses to offset your capital gains in the eyes of the Australian Taxation Office (ATO).
If you made a capital gain of $10,000 when selling a property this year but you made a capital loss of $10,000 when selling shares two years ago, you might be able to carry your loss forward and offset this year's gain entirely, thereby negating your need to pay CGT.
Frequently asked questions on capital gains tax
Tax law can get complicated and may leave many Aussies scratching their heads, wondering if their situation is accounted for. Here are some of the most common questions regarding capital gains tax:
1. Do I need to pay CGT if I've inherited a property?
Inheriting a property doesn't automatically trigger CGT, but you may be liable when you sell it. If the property was the deceased's primary residence before they passed and you sell it within two years of their death, it might be exempt from CGT. However, if it was an investment property or you sell it after the two-year window, CGT may apply.
2. Can I still claim a CGT discount if I operate a business from my home?
Yes, but the discount will only apply to the portion of the property that wasn't used to run a business.
3. Do I have to pay CGT on an overseas asset?
Yes, Australian residents are required to pay CGT when they sell overseas assets for a profit. Foreign residents who own Australian property will also need to pay CGT to the ATO when they sell their Australian asset.
See also: How to buy an overseas property from Australia
4. Does CGT apply if a property changes hands due to a relationship breakdown?
If you transfer a property to your former spouse or receive one as part of a separation or divorce settlement, CGT is usually deferred until the property is sold. The property is transferred at its original cost base, meaning the capital gain or loss is calculated based on the property's value when it was initially acquired by either spouse, not at the time of transfer.
Originally written by Gerv Tacadena in 2022. Last updated by Brooke Cooper in 2024.
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Collections: Capital Gains Tax Property Investment Selling your property
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