CGT is a tax you pay on the profits you make when you sell an asset. It's payable when you sell an investment property, but not your own home. And it only applies to assets that you purchased on or after 20 September 1985.
Any profit made on the sale of a CGT asset is included in your assessable income in the financial year that you sell the asset. This means the profit is added to your taxable income.
When you sell an investment property, or a home that doesn't qualify for the main residence exemption, any profit you make above the cost of acquiring and maintaining it is considered a capital gain.
Want to know a rough estimate on how much CGT you'll have to pay? Head to our CGT calculator to estimate your capital gains costs when selling a property or other asset.
At a very basic level, CGT is calculated by taking the amount you've sold the property for and subtracting everything you've spent on the property (the price you spent on the house, plus other expenses). Whether you've made money or lost money is your capital gains or loss.
Let's explain it further:
Your cost base is the price you paid for the property, plus other expenses and costs that came with ownership. Subtract any first home owner grants and claimed depreciation.
Expenses include:
Take the cost base and subtract that from the price you're selling the property for. That will tell you what your capital gain or loss is.
Once you've worked out the capital gain, the figure is then adjusted according to a number of variables, like the following:
There are 3 methods of calculating capital gains tax:
| Method | Description | How to calculate |
|---|---|---|
| Other method This calculation method is for those who have held an asset for less than 12 months. | This is the most basic method of CGT calculations. | Take the cost base away from the sale price. |
| Discount method This method is for those holding assets for more than 12 months. | Those using this method are entitled to a 50% discount on the capital gain for individuals or a 33.3% discount for super funds. For individuals, the 50% discount only applies to gains made before 1 July 2027, unless the property is an eligible new build. | Subtract the cost base from capital proceeds and deduct capital losses. Then take your discounted percentage and reduce the amount by it. |
| Indexation method If you bought the asset before 11:45am (ACT time) 21 September 1999 AND owned the property for more than 12 months. | You can increase the cost base by applying an indexation factor based on the Consumer Price Index (CPI) up to September 1999. | For more information on this calculation method, visit the ATO website. |
*Based on information from the ATO.
Once these factors are worked out, you'll be left with the amount of capital gains that will be included in your taxable income and taxed at your marginal rate. There are ways to avoid capital gains tax, though, whether fully or partially.
Legislation passed in June 2026 (the Treasury Laws Amendment (Tax Reform No. 1) Act 2026) replaces the 50% capital gains tax discount for individuals, trusts and partnerships from 1 July 2027.
Instead, investors who make a capital gain will pay a capital gains tax based on an inflation-adjusted cost base, with a minimum 30% tax rate. This only applies to gains made from 1 July 2027. Gains made before that date still get the 50% discount, and investors who buy an eligible new build can choose either method when they sell.
Under indexation, the original price you paid for an asset is adjusted for inflation, giving the investor a potential discount.
When inflation is high versus the growth of the asset, the new method can offer a bigger discount. When inflation is low, it can mean a bigger tax burden.
There are multiple scenarios where you can completely avoid CGT when selling your property. The most obvious exemption is if the property is your home (the main place of residence exemption): CGT only applies to investment properties.
You can avoid paying CGT if you sell a dwelling that's considered your main place of residence. You can only ever have one main residence at any given time unless you're selling your main residence and buying another.
The ATO doesn't give an exact description of what constitutes a main residence, but gives the following points to consider:
If you've lived in your home for the whole time you've owned it, haven't rented it out either completely or to a lodger and the land is smaller than 2 hectares, you'll get a full exemption on CGT when you sell.
This is helpful if you plan to live the renovator's life: selling your home, moving into another, renovating it and then selling the renovated property. And while you won't make a rental income if you go down this path, all profits made from the renovation are exempt from CGT.
Property is exempt from capital gains tax if you purchased it before 20 September 1985.
If you have to move out of your home and choose to rent it out, you may be exempt from some CGT liability under the "Temporary Absence Rule".
What is the rule? If you move out of your home and rent it out, under the law, the property is still treated as your principal residence for a period of up to 6 years. If you sell the property within this time frame, you will be exempt from paying CGT if you profit from the sale. This rule only affects CGT when you sell. The rent you earn while you're away is still taxable income.
What's the catch? You can only have one main residence at a time, so the 6-year rule only works if you don't treat another property as your main residence during that period.
If you're moving out of your home and renting it out, you're going to need somewhere else to live. If you own both, you'll need to choose 1 of the 2 dwellings as your main residence, and CGT may apply when you sell the other one.
Buying a property through your SMSF is one way you can generate profits from residential real estate and avoid paying CGT. You use your super fund to purchase the home along with an SMSF property home loan to make up the total. You then pay off the loan through your super contributions.
If you sell the property once you've retired, you'll pay no capital gains on the property. Even if you sell the property while you're still accumulating your super, this will be taxed at a rate of only 15%. Holding onto the property for longer than a year will effectively drop this rate to 10%.
Buying a property with your SMSF comes with some risks, so you should never attempt it without first seeking professional advice.
While avoiding CGT liability altogether may not be possible if you haven't lived in the property before you rented it out, you can still apply for partial exemptions in some circumstances.
Making an investment property your main residence
Let's say you changed your mind and decided to live in the property you purchased as an investment. In this case, you'll be partially exempt from CGT. The CGT you'll owe will be worked out by comparing the number of days you lived in the property to the number of days you rented the property.
Bill buys a property and rents it out for 2 years, but later decides to move into it and lives in it for 6 years. He then sells it, making a capital gain of $400,000. He only has to pay CGT on a quarter of that amount, which works out to be 2 years out of the 8 that are not eligible for an exemption. This means Bill would add $100,000 to his taxable income because of the CGT. He's also held onto the property for longer than 12 months, so after taking into account the 50% discount he's entitled to because of this, he would be able to get away with an increase to his taxable income of just $50,000.Using your main residence as a business
If you're using your main residence to generate income, the CGT exemption is reduced accordingly. It can depend on whether you use your business as a "place of business" or a "place of convenience", as per the ATO. Different rules may apply according to how you use your main residence, so it's best to consult your accountant to see which situation applies to you.
If you are over 55 and sell a small business property, there may be a $500,000 portion that is exempted from CGT. A sale of a small business when used to support your retirement is also exempt.
You can deduct the following if you're using your main residence as a place of business:
Maintenance costs (allowable for both a place of business and a place of convenience)
Ownership costs (only allowed for a place of business)
While this isn't technically an exemption, if you buy an investment property and hold it for more than 12 months, you're entitled to a 50% discount on your capital gain. The discount is 33.3% for super funds. Under legislation passed in June 2026, the 50% discount will only apply to gains made before 1 July 2027, unless the property is an eligible new build.
A capital loss is when you've sold the asset for less than your "reduced" cost base. A reduced cost base is the same as a normal cost base, although it also includes any balancing adjustments such as improvements to the property.
You can offset any capital losses you've made for the year against any capital gains you've made and this will reduce the amount of capital gains that'll be included in your taxable income. However, you can't deduct capital losses from taxable income. You can also carry any capital losses forward in future years and offset these against capital gains you've made.
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