If you own an investment property in NSW and you’re thinking about selling, Capital Gains Tax (CGT) is almost certainly going to be part of the conversation. Understanding how it works — and what exemptions or concessions you may be entitled to — could save you a significant amount of money, or at the very least prevent a nasty surprise at tax time.
What Is Capital Gains Tax?
CGT is not a separate tax — it’s part of your income tax. When you sell an asset like an investment property for more than you paid for it, the profit (your capital gain) is added to your taxable income for that financial year and taxed at your marginal rate.
Your capital gain is calculated as:
Capital Gain = Sale Price − Cost Base
Your cost base includes the original purchase price, plus buying and selling costs (stamp duty, legal fees, agent commissions), and capital improvements made over time.
The 50% CGT Discount
This is the big one. If you’ve owned your investment property for more than 12 months, you’re eligible for the 50% CGT discount. That means only half of your capital gain gets added to your taxable income.
For example, if you made a $200,000 gain on a property you held for three years, only $100,000 would be included in your assessable income for that year — a meaningful difference at most marginal tax rates.
- Must have held the property for more than 12 months prior to sale
- Applies to individuals and trusts (not companies)
- The discount is applied after any allowable capital losses are offset
The Main Residence Exemption
If the property has been your principal place of residence for the entire time you owned it, you’re generally fully exempt from CGT. However, the moment a property is rented out or used to produce income, the exemption starts to be limited.
If you lived in the property first and then rented it out, you may be eligible for the 6-year absence rule — which allows you to treat the property as your main residence for up to six years after you stopped living in it, provided you don’t nominate another property as your main residence during that period.
Partial Exemptions — Where It Gets Complicated
Many Wollongong property owners find themselves in a grey zone: they may have purchased a home, lived in it for a few years, then rented it out when they moved elsewhere. In these cases, your CGT liability is calculated on a proportional basis — based on the number of days the property was used as your main residence versus the number of days it was an investment property.
- The calculation uses the total days owned vs days used as principal residence
- Improvements made during the rental period affect the cost base calculation
- If the property was rented before ever being your home, no main residence exemption applies
"One of the most common mistakes we see is property owners assuming they won't owe CGT because they once lived in the property. The rules around partial exemptions are nuanced, and getting advice before you sign a contract of sale can make a significant difference to the outcome."
What About Properties Held in a Trust or SMSF?
If your investment property is held in a trust, the 50% discount still applies, but the mechanics of how the gain is distributed to beneficiaries needs careful consideration. Properties held inside a Self-Managed Super Fund (SMSF) have their own CGT rules — assets held for more than 12 months in accumulation phase attract a 10% effective tax rate on the gain, while assets sold in pension phase may be completely CGT-free.
Timing the Sale — A Legitimate Strategy
Because CGT is assessed in the financial year the sale settles, there are sometimes legitimate reasons to time a settlement just after 30 June — particularly if your income in the following financial year will be lower (due to retirement, career change, or other factors). This is not tax avoidance; it’s sensible planning.
- Settlement date determines which financial year the gain falls in
- Receiving a lower income in the settlement year reduces the effective tax rate on the gain
- Capital losses from other assets in the same year can offset the gain
When Should You Get Advice?
Ideally, before you sign anything. Once contracts are exchanged, your options narrow considerably. A conversation with your accountant before you list the property allows time to review your ownership structure, assess your cost base accurately, and model different settlement scenarios.
The Wollongong and Illawarra property market has seen significant appreciation over recent years, which means CGT liabilities on even modest properties can be substantial. Planning early is simply good practice.
