Tips to Avoid Capital Gains Tax on Investment Property in Australia

Australia’s Capital Gains Tax (CGT) on investment property can significantly impact your profits when selling, with rates depending on your income tax bracket. Typically, CGT is applied at the same rate as your income tax, with individuals in the higher tax brackets paying up to 45% on their capital gains.

Fortunately, there are legal strategies to reduce, defer, or even eliminate CGT. Whether you’re moving into your rental property, leveraging tax exemptions, or using superannuation contributions, careful planning can help minimise your tax liability.

Unconditional Finance breaks down effective strategies to help you avoid capital gains tax when selling investment property in Australia—covering key exemptions, tax-saving strategies, and common mistakes to avoid.

Understanding Capital Gains Tax (CGT) on Investment Property

CGT is charged when you sell an investment property for more than you paid. It’s based on the difference between the purchase price and the selling price, minus eligible deductions. Since CGT is not a separate tax but part of your income tax, it is added to your taxable income for that financial year.

When Do You Have to Pay CGT?

A CGT event is triggered when:

• You sell an investment property for profit
• You gift or transfer ownership of the property
• You convert the property from an investment to your main residence

How CGT Is Calculated

The taxable capital gain is determined using this formula:

(Sale Price – Purchase Price) – Eligible Deductions = Capital Gain

If the property has been held for more than 12 months, you may qualify for a 50% CGT discount on investment property, which applies only to Australian residents and may help reduce capital gains tax liabilities. Non-residents are not eligible for this discount, as it is designed to encourage long-term investment and reduce tax burdens on Australian property owners.

How Much is Capital Gains Tax in Australia?

Since capital gains are added to your taxable income, your CGT liability depends on your income tax bracket. A higher capital gain may push you into a higher tax bracket, increasing your tax obligations.

Example: CGT Calculation

Scenario 1: Selling Within 12 Months (No Discount)

• Purchase Price: AUD 500,000
• Sale Price: AUD 600,000
• Capital Gain: AUD 100,000
• Taxable Amount: AUD 100,000 (No Discount Applied)
• Tax Rate (e.g., 32.5% if total income is AUD 90,000): 32.5%
• CGT Payable: AUD 32,500

Scenario 2: Selling After 12 Months (50% Discount Applied)

• Capital Gain: AUD 100,000
• Taxable Amount After 50% Discount: AUD 50,000
• CGT Payable: AUD 16,250

How to Avoid Capital Gains Tax on Property in Australia

1. Use the Main Residence Exemption

If your property qualifies as your main residence, you may be fully exempt from capital gains tax on investment property when selling. The ATO considers several factors, such as:

• How long you have lived in the property
• If your personal belongings are there
• If your mailing address, electoral roll, and utility bills reflect the residence
• If the property is where your family primarily resides

2. Hold the Property for Over 12 Months

If you own the property for more than a year, you may qualify for a 50% CGT discount, which could reduce the taxable portion of your profit. This policy, introduced in 1999 as part of tax reforms, was designed to encourage long-term investment and economic stability while reducing speculative property trading.

Beyond tax savings, long-term ownership allows investors to benefit from market cycles, where property values historically tend to appreciate over time. Additionally, keeping a property for a longer duration provides opportunities to increase its cost base by accounting for improvements and maintenance, further reducing taxable gains. Investors can also capitalise on rental income growth, which may improve their overall financial position when the property is eventually sold.

However, it’s important to note that holding a property for more than 12 months does not eliminate CGT altogether. The discounted gain is still added to your assessable income, meaning the actual tax benefit depends on your marginal tax rate. Those in higher tax brackets may still face a considerable CGT liability despite the discount.

3. Invest Through a Self-Managed Super Fund (SMSF)

Holding property within an SMSF can offer significant CGT benefits, as super funds pay a lower tax rate of 15% on capital gains, compared to the higher marginal tax rates individuals typically face. If the property is held until the pension phase, CGT could be eliminated, making it a potentially beneficial tax strategy for long-term wealth accumulation.

However, investing through an SMSF comes with strict compliance regulations. The ATO enforces restrictions on borrowing, property use, and contributions, meaning investors must carefully navigate rules around Limited Recourse Borrowing Arrangements (LRBAs) and ensure the property aligns with their fund’s sole purpose test. 

Additionally, SMSF property investments can be less liquid, making it difficult to sell quickly if needed. Despite the tax benefits, investors should consider the ongoing management responsibilities and potential administrative costs associated with SMSFs before proceeding.

4. Offset Capital Gains with Capital Losses

If you sell other assets (e.g., shares, managed funds, or other investment properties) at a loss, you can offset those losses against your capital gain, reducing your CGT liability. Tax-loss harvesting could help lower your capital gains tax bill for the year.

If your losses are bigger than your gains, you may be able to use the extra losses to reduce taxes on future profits. However, the ATO has strict rules on what qualifies as a legitimate capital loss, and artificial loss creation through wash sales is not permitted.

5. Consider a Trust Structure

Property investors often use family trusts to distribute income among beneficiaries, potentially reducing overall tax liability by allowing capital gains to be allocated to individuals in lower tax brackets. Trust structures also provide greater control over asset protection and estate planning, making them an attractive option for long-term wealth management. 

However, setting up and maintaining a trust involves complex legal and tax obligations, including ongoing compliance requirements and potential limitations on accessing CGT discounts. Investors should carefully assess whether a trust structure aligns with their financial goals and consult a tax professional before proceeding.

6. Timing the Sale of Your Property

Selling in a low-income year or after retirement can be an effective strategy to reduce CGT, as capital gains are added to your taxable income. By deferring the sale to a year when your overall income is lower, such as during a career break, transition to part-time work, or retirement, you may fall into a lower tax bracket, resulting in reduced CGT liability.

For those nearing retirement, it may be beneficial to coordinate the sale with a structured withdrawal plan from superannuation or other investments to optimise tax efficiency. Additionally, spreading capital gains over multiple financial years—if selling multiple assets—may help avoid higher tax brackets and mitigate the impact of CGT.

However, market conditions should also be considered when timing a sale. While a lower tax year may be optimal, selling in a favourable property market could yield greater financial benefits that outweigh tax savings. Consulting with a tax expert can help determine the most tax-efficient and strategically beneficial time to sell.

7. Rollover Relief for Small Business Owners

If your property is used for business purposes, you may qualify for rollover relief for CGT on investment property, allowing you to defer capital gains tax on property when reinvesting in another eligible asset. This relief is available to small businesses meeting certain turnover and asset value thresholds set by the ATO. 

To qualify, the replacement asset must be acquired within a specific timeframe, and its use must align with business operations. While rollover relief can be a valuable tool for tax deferral, it’s important to consider potential CGT implications when eventually disposing of the new asset, as deferred gains will become taxable at that point.

8. The 6-Year Rule Exemption

If you move out and rent your home, you may still avoid capital gains tax for up to six years, as long as it meets ATO rules.

• You can treat your property as your PPOR for up to six years while renting it out.
• If you sell within this period, you may avoid CGT.
• Moving back in before selling resets the six-year period, allowing property owners to restart the exemption timeframe. This strategy can be used multiple times, provided each absence does not exceed six years, the property is not treated as an investment for tax purposes, and the owner does not nominate another property as their main residence during that time. However, repeated use of this exemption should be carefully planned, as tax implications and ATO scrutiny may apply.

This rule may be beneficial for those who relocate for work or other personal reasons but intend to return to the property.

Maximising Your Investment Returns While Reducing CGT

Capital Gains Tax (CGT) can impact your profits, but with the right strategies, you may be able to reduce, defer, or even eliminate it. Whether it’s leveraging exemptions like the main residence rule, holding your property for over 12 months, or using superannuation contributions, careful planning is key.

Timing your sale strategically and offsetting gains with capital losses can further lower your tax burden. However, CGT rules can be complex, so consulting a tax professional or Sydney mortgage broker can help you make the most tax-efficient decisions.

Learning about CGT rules and planning your investments wisely can reduce capital gains tax, protect your profits, and grow your investment portfolio while remaining compliant with ATO regulations.

Need help reducing your CGT liability? Unconditional Finance can help you find tax-saving mortgage solutions and guide you through smart investment strategies.