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Capital gains tax on property
You usually have to pay capital gains tax (CGT) when you sell an asset for a profit, but when it comes to capital gains tax on property, the rules are a bit different.
26 Apr 2024
You usually have to pay capital gains tax (CGT) when you sell an asset for a profit, but when it comes to capital gains tax on property, the rules are a bit different.
You are generally exempt from paying CGT when you sell your home. But there are some circumstances where the tax may still apply. In this article, we look at some general rules around capital gains tax on property, but it may be beneficial to seek advice from a qualified professional regarding your specific situation.
What is capital gains tax?
Capital gains tax or CGT is the tax you pay on profits from selling an asset, such as a property, the Australian Taxation Office (ATO) explains. It applies to assets acquired after 20 September 1985 (the date the tax was introduced).
You report capital gains (profits) and capital losses in your income tax. You then pay tax on your capital gains at your income tax rate.
It is not a separate tax. Instead, the ATO says capital gains are added to your income tax and can increase the amount of tax you need to pay. A capital gain can also potentially increase your assessable income enough to push you into a different tax bracket.
Do you pay capital gains tax when you sell your house?
If the property you are selling is your main residence, you generally do not have to pay CGT. However, there are some exemptions to this. For example, if you rented out part of your home, flipped it or ran a business out of it you may need to pay CGT.
According to the ATO, your home will be exempt from CGT if it:
- has been the home of you, any partner and other dependants for the whole period you have owned it
- has not been used to produce income – so, you haven’t run a business from it, rented it out or flipped it
- is on land of two hectares or less.
This is known as the ‘main residence exemption’. If you don’t meet all these conditions, the ATO says you may still be entitled to a partial exemption. You can work out what proportion of your property is exempt using the ATO’s property exemption tool.
If you inherit a property and later sell it, you may be exempt from CGT. The ATO outlines the rules that apply in this situation. It could also be worth getting tax advice from a qualified expert.
What is my main residence?
Your main residence is your home. The ATO says a dwelling will generally be considered to be your main residence if:
- you and your family live in it
- your personal belongings are in it
- it is the address your mail is delivered to
- it is your address on the electoral roll
- services such as gas and power are connected.
To be your main residence, your property must have a dwelling on it and you must have lived in it. This includes a house or apartment. If you build or renovate your home on land you own, the ATO says you can generally treat it as your main residence for four years before you move in.
The length of time you stay in the dwelling and whether you intend to occupy it as your home can also be relevant, the ATO says.
If you move homes, the ATO says you can treat your new home as your main residence so long as you move in as soon as practicable. You can also treat your former home as your main residence for up to six months if you haven’t yet sold it.
Additionally, under the ‘six-year rule’ if you use your former home to produce income (such as renting it out), you can choose to treat it as your main residence for up to six years after you stop living in it.
→ Find out more: What is the six-year rule for capital gains tax?
How can I reduce capital gains tax when selling my property?
If you owned the property for at least 12 months before selling it and are an Australian resident, the ATO says you will generally be eligible for a 50% discount on your capital gain. This is known as the capital gains tax (CGT) discount. Exemptions apply. For example, if you used your home as a rental or business less than 12 months before selling or disposing of it, the ATO says you can’t use the discount.
There may be other ways to minimise CGT. For more information, visit the ATO website. Also consider whether you need to consult a professional to handle your taxes.
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Cover image source: pearcec/Shutterstock.com
This article was reviewed by our Editor-in-Chief Nina Rinella before it was updated, as part of our fact-checking process.
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