When it comes to selling property in Australia, Capital Gains Tax (CGT) can have a big impact on your finances—especially if you’re not prepared for it! But don’t stress. With the right strategies, you can minimise—or even avoid—CGT altogether. In this blog, I’ll break down the key rules and exemptions to help you make informed decisions when it comes to your property.
What is Capital Gains Tax (CGT)?
Simply put, CGT is the tax you pay on the profit you make from selling an asset, such as a property. Your capital gain is the difference between what you paid for the property (including costs like stamp duty and legal fees) and what you sold it for.
While CGT applies to most properties, there are several exemptions and discounts available—especially if the property was your main residence.
The Main Residence Exemption
The Main Residence Exemption is one of the most powerful ways to avoid CGT when selling a property. If a property has been your main residence (meaning you’ve genuinely lived in it as your home), you can generally sell it CGT-free.
To qualify, the property must have been your primary place of residence—where you sleep, eat, receive mail, and store your personal belongings. There’s no set minimum time you need to live there, but the longer you do, the stronger your case if the ATO ever asks questions.
A couple of things to keep in mind:
- You can only claim this exemption on one property at a time.
- If you’ve used part of the home for income-producing purposes (like running a business or renting it out), CGT may apply to that portion.
This exemption, combined with other rules like the 6-Year Rule, can dramatically reduce (or even eliminate) your CGT bill when it’s time to sell.
The 6-Year Rule (Temporary Absence Exemption)
Ever wondered if you could move out, rent your property, and still avoid CGT? Enter the 6-Year Rule, also known as the Temporary Absence Exemption.
How it works:
- If your property was your main residence before you moved out, you can continue to treat it as your main residence for up to 6 years after moving—even if you rent it out!
- If you sell the property within this 6-year window, no CGT applies for that time.
- Bonus: If you move back in, the 6-year clock can reset, giving you even more flexibility.
Key Point: You must have lived in the property first to claim this exemption.
Just keep in mind that if you own another main residence during this period, you might need to apportion the exemption, meaning some CGT could still apply.
The 50% CGT Discount
If you’ve held onto your property for 12 months or more, you may be eligible for a 50% discount on your capital gain. Yep, you read that right—half of your profit could be tax-free!
Who can claim this?
- Individuals and trusts are eligible.
- Companies are not eligible for this discount.
This discount applies after you’ve deducted costs like the purchase price, stamp duty, legal fees, and any improvements you’ve made to the property. It’s one of the easiest ways to reduce your CGT—just by holding onto your property a little longer.
Granny Flats & CGT
Thinking of adding a granny flat? It can be a great investment, but it’s important to understand the potential CGT implications.
When CGT may apply:
- No CGT: If the granny flat is used for a family member without a formal rental agreement.
- CGT applies: If there’s a formal rental agreement and you’re earning rental income, CGT will likely apply when you sell.
Tip: If you use the granny flat as a home office and claim part of your mortgage interest, that portion of the property may be treated as income-producing, which can trigger CGT when you sell.
Claiming Mortgage Interest as a Business Expense
Many small business owners claim a portion of their home’s mortgage interest as a business expense, especially if they have a home office setup.
What to know:
- The part of the property claimed as a business expense is treated as income-producing.
- When you sell the property, you may need to pay CGT on the business-use portion of the capital gain.
This doesn’t mean you shouldn’t claim legitimate expenses, but it’s something to keep in mind when planning for the future sale of your property.
Final Thoughts
Understanding CGT can feel overwhelming, but with the right strategies in place, you can significantly reduce your tax liability—or even avoid it altogether. Whether you’re planning to sell soon or just thinking ahead, a little planning can save you a lot of money.
