Investors model the purchase carefully and almost never model the exit. Capital gains tax is the largest single cost of selling — and with planning it is also the most predictable.
When CGT applies
Capital gains tax applies when you sell (or otherwise dispose of) a property that is not your main residence. The gain is the difference between what you received and what the property cost you — including everything that added to that cost along the way. The gain is added to your assessable income in the year of sale.
Building the cost base
Most investors understate the cost base and overstate the gain. Every item below reduces your taxable gain:
- Purchase price — what you paid
- Stamp duty and transfer fees — often the largest overlooked item
- Legal and conveyancing costs — at purchase and at sale
- Capital improvements — extensions, structural renovations and initial repairs (not day-to-day repairs, which were deductible as expenses)
- Selling costs — agent commission, advertising, legal fees on the sale
- Loan costs for the purchase — such as mortgage stamp duty not already claimed
The 50% CGT discount
If you are an individual (or a trust) and you held the property for more than 12 months, you can halve the capital gain before it is added to your income. That turns a $200,000 gain into $100,000 of assessable income. Superannuation funds get a 33.3% discount; companies get no discount at all.
A worked calculation
| Sale price | $1,050,000 |
| Less selling costs (commission, legal, advertising) | -$32,000 |
| Net proceeds | $1,018,000 |
| Purchase price | $720,000 |
| Plus stamp duty and purchase costs | $34,000 |
| Plus capital improvements | $40,000 |
| Cost base | $794,000 |
| Capital gain before discount | $224,000 |
| 50% CGT discount (held more than 12 months) | -$112,000 |
| Assessable capital gain | $112,000 |
| Illustrative tax at 37% marginal rate | $41,440 |
Illustrative. The marginal rate, ownership structure and holding period change the outcome.
Capital losses only offset capital gains
A capital loss from any asset — shares, another property, a managed fund — can only reduce capital gains, not your salary or rental income. Losses are carried forward until you have a gain. The distinction matters because a rental loss (revenue) is treated completely differently from a capital loss.
The main residence exemption and the six-year rule
Your family home is generally CGT-free. If you rent out your former home, you can treat it as your main residence for up to six years while it is rented, preserving the exemption. The interaction with a new main residence and partial exemptions is where professional advice pays for itself.
The purchase decision sets up the exit. Every improvement decision while you own the property either adds to the cost base (lowering future CGT) or is a deductible repair (lowering current tax). Both are legitimate — knowing which is which is the skill.