Capital gains tax on property is where small decisions made years ago — renting out a room, keeping the old house, not getting a valuation — turn into five-figure tax bills at settlement. The structure is logical once you see it: an exemption for your home, carve-outs where the home earns income, a cost base that rewards good records, and a discount about to be replaced.
The main residence exemption
A capital gain on your home is disregarded if you are an Australian resident and the dwelling was the home of you, your partner and dependants for the whole period you owned it, wasn't used to produce income, and sits on land of two hectares or less. Foreign residents at the time of sale generally lose the exemption entirely.
The 6-year absence rule
When you stop living in your home you can choose to keep treating it as your main residence. If it isn't producing income — left vacant, or used by a family member rent-free — the choice lasts indefinitely. If you rent it out, the choice lasts for up to six years per absence. Move back in and move out again and a fresh six years begins. Only income-producing years count toward the six.
Two conditions attach. The property must have been your main residence first — you can't apply the rule to a property you rented out before ever living in it — and you can't treat any other home as your main residence for the same period, apart from a six-month overlap when moving house. Choosing the old house therefore exposes the new one for the same years; which to cover is a calculation.
Exceed six years in one absence and the excess period is taxable. The cost base then resets to the home's market value on the day it was first rented, and the gain is apportioned by days over the limit against total days from that deemed acquisition.
Renting part of your home or running a business from it
If part of your home produces income while you live there, that part is subject to CGT for that period. The ATO's test is whether you would be entitled to claim part of the interest on a home loan — if yes, the same proportion of the gain is assessable, whether or not you actually claimed the interest. A convenience home office doesn't trigger it; a surgery or a tenanted bedroom does. The taxable gain is: gain from market value when income use began × floor-area percentage × (income-producing days ÷ days since income use began). A home used partly for income before you moved out can't be fully covered by the six-year rule either — the income-producing fraction stays taxable.
If you first used your home to produce income after 20-08-1996, you are deemed to have acquired it at market value on that date. Get a valuation at the time.
Property acquired before 20 September 1985
Assets acquired before CGT began on 20-09-1985 are exempt. Major improvements made after that date can be treated as separate assets, and when a pre-CGT property is inherited, the heir's cost base resets to market value at the date of death. One warning: the 2027 reforms bring pre-CGT assets into the net for gains accruing on or after 01-07-2027.
What goes into the cost base
The cost base has five elements: (1) what you paid; (2) incidental costs of buying and selling — stamp duty, conveyancing and legal fees, agent's commission, advertising, valuation fees, borrowing costs and mortgage discharge fees; (3) costs of owning the asset — rates, land tax, insurance, repairs and interest — but only where you couldn't claim them as deductions and you acquired the property on or after 21-08-1991; (4) capital costs to improve or preserve its value; and (5) costs of defending your title. Anything you claimed as a deduction, including capital works deductions, comes out. Non-deductible holding costs on a privately used holiday house are therefore worth keeping receipts for.
The CGT event happens on the contract date, not settlement, which decides both the income year and whether the 12-month holding period is met.
The 50% discount — and what replaces it
Today, an Australian-resident individual who has owned a property for at least 12 months halves the capital gain after applying any capital losses. Trusts get the same; complying super funds get one-third; companies get nothing. A home that was first rented less than 12 months before sale doesn't qualify.
From 01-07-2027 the 50% discount for individuals, trusts and partnerships is replaced by cost base indexation for CPI and a 30% minimum tax rate on gains accruing on or after that date. The transition splits a property you already own into two gains: the gain up to 30-06-2027 keeps the 50% discount, and the gain after is taxed under the new rules — using the property's value immediately before 01-07-2027 as its cost base, or an "apportionment method" the Government is still drafting. Nothing is reported until you sell. New residential dwellings and affordable housing may elect to stay on the current rules, and the main residence exemption is not changing. The practical step is a defensible valuation of every investment property as at 30-06-2027.
Inherited property
Inheriting a property is not a CGT event; selling it is. If the home was the deceased's main residence and not producing income just before death — or they acquired it before 20-09-1985 — you can sell it fully exempt if the contract settles within two years of death, even if you rented it out meanwhile. The ATO can extend the two years for delays outside your control. Beyond two years, the exemption continues only while the home is the main residence of the deceased's spouse, someone with a right to occupy under the will, or you as beneficiary.
Where a gain is taxable, your cost base is the deceased's cost base for post-1985 property, or market value at death for pre-1985 property and for a post-1996 inheritance of a home that was the deceased's exempt main residence. The deceased's ownership counts toward the 12-month discount test, and the executor's administration costs can be added.
Records
Keep the purchase and sale contracts, stamp duty and legal receipts, loan documents, improvement invoices with photos, rates and insurance records, periods of personal use and rental, and any valuation — for five years after the sale, and for a home that may one day lose its exemption, from the day you bought it. The reform adds one more: the value immediately before 01-07-2027.
What SMT does
We model the six-year choice between two properties, apportion gains where a home has been rented or used for business, rebuild cost bases from old records, handle deceased estate sales and the two-year window, and from 2027 run both the pre- and post-reform gains. Ask before the contract is signed — see our tax planning service, our rental deductions guide and individual tax returns.
Sources
- ATO — Eligibility for main residence exemption
- ATO — Treating former home as main residence (6-year rule)
- ATO — Using your home for rental or business
- ATO — List of CGT assets and exemptions (pre-1985 assets)
- ATO — Cost base of assets
- ATO — CGT discount
- ATO — Capital gains tax reform
- ATO — Reforming negative gearing and capital gains tax (new legislation)
- ATO — Inherited property and CGT
- ATO — Cost base of inherited assets
- ATO — Keeping CGT records
Frequently asked
How is CGT on investment property calculated?
Capital proceeds (usually the contract price) less the cost base — purchase price plus incidental costs such as stamp duty, legal fees and agent's commission, plus capital improvements and any non-deductible holding costs. Capital losses are deducted first, then if you have owned the property for more than 12 months the 50% discount applies. The net gain is added to your income in the year the sale contract is signed.
What is the CGT 6 year rule?
If you move out of your home and rent it out, you can choose to keep treating it as your main residence for up to six years, so it stays exempt from CGT. The six years restart each time you move back in and out again. If the home is left vacant rather than rented, the exemption continues indefinitely. You can't treat another property as your main residence for the same period.
Is there a capital gains tax calculator for Australian property?
The ATO has a CGT calculator and record keeping tool and a separate CGT property exemption tool for working out the exempt proportion of a home. They can't handle inherited property, and they don't yet apply the indexation and minimum-rate rules that start on 1 July 2027, so for anything beyond a straightforward sale we run the calculation ourselves.
Is there CGT on inherited property?
Not when you inherit it — CGT is deferred until you sell. If the home was the deceased's main residence and not producing income just before death, or they bought it before 20 September 1985, you can sell it CGT-free provided the contract settles within two years of the death (extendable in exceptional circumstances). Otherwise you work out a gain from a cost base that is either the deceased's cost base or the market value at death, depending on the facts.
Do I pay CGT when selling my house in Australia?
Generally not if it has been your main residence for the whole time you owned it, hasn't been used to produce income and sits on two hectares or less. You pay CGT on the part of the gain that relates to any period or area used for rent or business, and you may pay it if you were a foreign resident when you sold.
What happens to the CGT discount in 2027?
For individuals, trusts and partnerships the 50% discount is replaced from 1 July 2027 by cost base indexation and a 30% minimum tax rate on gains accruing after that date. Gains accrued before 1 July 2027 on property you already own keep the 50% discount, which means the property's value immediately before 1 July 2027 will matter when you eventually sell. The main residence exemption is unchanged.