Capital Gains Tax on Investment Property — 50% Discount Rule

Capital Gains Tax on Investment Property — 50% Discount Rule

When you sell an Australian investment property, you pay Capital Gains Tax (CGT) on the profit. But hold it for over 12 months and you get a 50% discount on the taxable gain. Here’s how the math works in 2026.

The Core Mechanic

CGT is calculated on the difference between your cost base (purchase price + buying/holding/selling costs) and the sale proceeds. That difference is your “capital gain.”

If you’ve held the asset over 12 months (Australian resident, individual ownership): you only pay tax on 50% of the gain, at your marginal rate.

A Concrete Example

• Bought investment property in 2018 for $550,000
• Stamp duty + legal + buying costs: $30,000
• Sold in 2026 for $880,000
• Selling costs (agent, legal): $25,000
• Cost base: $580,000 ($550k + $30k)
• Net sale proceeds: $855,000 ($880k − $25k)
• Capital gain: $275,000
• After 50% discount: $137,500 taxable

If your marginal tax bracket is 37%, the CGT on this sale = $50,875.

Without the 50% discount: $275,000 × 37% = $101,750. The discount roughly halves the tax bill.

What Counts in Cost Base

Your cost base includes (often missed):

• Original purchase price
• Stamp duty
• Legal/conveyancing fees
• Building inspection
• Buyer’s agent fees
• Capital improvements during ownership (extensions, renovations, structural changes)
• Capital costs (legal disputes, easements granted) during ownership

Note: maintenance and repairs deducted against rental income during ownership are NOT added to cost base — they were already claimed.

What Reduces Cost Base

Building depreciation claimed against rental income during ownership reduces your cost base when you sell. This is depreciation recapture in CGT form.

If you claimed $40,000 of building depreciation over the holding period, your effective cost base drops by $40,000 — meaning $40,000 more taxable gain.

Strategies That Reduce CGT

1. Time the sale in a low-income year. If you can defer the sale to a year when your other income is low (sabbatical, retirement transition, parental leave), the marginal-rate portion of the CGT drops.

2. Carry-forward capital losses. If you have losses from selling shares or other assets, they offset capital gains. Realised losses last forever until used.

3. Spousal ownership balancing. If you and your spouse co-own and one has a lower bracket, structure ownership 70/30 or 80/20 in favor of the lower-bracket spouse from the start.

4. Hold over 12 months — always. Selling at 11 months loses the 50% discount entirely. Sometimes worth waiting a few more weeks.

5. Track every renovation. Keep receipts for capital improvements. A $80k kitchen redo over the holding period adds $80k to cost base — and saves ~$15k–$30k in CGT depending on your bracket.

The “Main Residence” Exemption

Your principal place of residence (PPR) is fully exempt from CGT. So properties you’ve lived in have advantages.

The 6-year rule is a powerful tool: if you live in a property, then rent it out, you can keep claiming it as your PPR for up to 6 years (and avoid CGT on it) provided you don’t claim a different property as your PPR during that time.

Couples can have one PPR designation between them — strategic timing matters for households with multiple properties.

When CGT Isn’t Owed

• Sale of PPR (subject to rules)
• Sale of assets owned before 19 September 1985 (pre-CGT)
• Death (transferred to beneficiary at cost base — no CGT triggered)
• Spousal transfer in some circumstances

Bottom Line

The 50% CGT discount makes long-term property investment in Australia tax-favourable. Hold over 12 months, track all capital costs, consider PPR strategy, and time the sale in a low-income year if possible. For large gains, consult a tax accountant well before listing.