Capital Gains Tax on Investment Property Australia: What Every Investor Needs to Know

Capital gains tax on investment property is one of the largest single tax bills most Australians will ever face — yet most property investors do not understand how it is calculated until they are about to receive one. The 2026 federal budget introduced changes that affect every investor who has purchased or will purchase residential investment property. This guide covers everything: how CGT is calculated, what changed in 2026, the discount rates that apply, how to reduce your bill legitimately, and the one structure that eliminates CGT entirely. The ATO's official guidance is at ato.gov.au/cgt-rental-properties.

Capital gains tax is not a separate tax — it is an addition to your assessable income for the year in which you sell. The capital gain is added to your other income and taxed at your marginal rate.

Step 1: Calculate the capital gain
Capital gain = Sale price − Cost base
The cost base includes: purchase price, stamp duty, legal fees on purchase, capital improvements made during ownership, and selling costs (agent commission, legal fees on sale). It excludes costs that were already deducted as rental expenses.

Step 2: Apply the CGT discount (if applicable)
If the property was held for more than 12 months, a CGT discount applies — reducing the assessable gain before your marginal rate is applied.

Step 3: Add to income and apply marginal rate
The discounted capital gain is added to your other assessable income for the year. Your marginal rate applies to the total.

Example — property held more than 12 months, post-2026 cutoff:
Purchase price: $650,000 (including costs)
Sale price: $1,200,000 (after selling costs)
Capital gain: $550,000
After 33% CGT discount: $368,500 assessable
If total income including the gain = $500,000: marginal rate 47%
CGT payable: $368,500 × 47% = $173,195

The 2026 federal budget introduced two CGT changes that affect residential investment property investors:

1. CGT discount reduced from 50% to 33% for new purchases. For residential investment properties where contracts were exchanged after the 2026 budget cutoff date, individuals receive a 33% CGT discount (not 50%) on assets held more than 12 months. This means 67% of the gain (not 50%) is assessable.

Impact on a $500,000 capital gain at 47% marginal rate:
Pre-cutoff property (50% discount): $250,000 × 47% = $117,500 CGT
Post-cutoff property (33% discount): $335,000 × 47% = $157,450 CGT
Difference: $39,950 more CGT on the same gain.

2. Properties purchased before the cutoff are fully grandfathered. If you owned the property before the cutoff, the 50% CGT discount continues to apply for the entire holding period — however long you hold it. Nothing changes for existing holdings.

What did not change:
The 12-month holding requirement for any discount
SMSFs in pension phase: still 0% CGT
SMSFs in accumulation phase: still 33% discount (unchanged)
Trusts: still distribute gains to beneficiaries who apply their individual discount
Companies: still no CGT discount (this was never available to companies)

Individual, property purchased before 2026 cutoff, held 12+ months: 50% discount → 50% of gain assessable
Individual, property purchased after 2026 cutoff, held 12+ months: 33% discount → 67% of gain assessable
Individual, any property, held less than 12 months: No discount → 100% of gain assessable
SMSF accumulation phase, held 12+ months: 33% discount → 67% of gain assessable at 15% fund tax rate
SMSF pension phase, held any period: 0% tax → $0 CGT
Discretionary trust, held 12+ months: 50% discount distributed to beneficiaries who apply their individual rates
Company, any property, any period: No discount → 100% of gain at 25-30% company rate (but then dividend tax on distribution)

The cost base is the single most controllable variable in your CGT calculation. A higher cost base means a lower capital gain means less tax. Most investors systematically underestimate their cost base because they do not record all eligible costs from day one of ownership.

What belongs in the cost base:
Purchase price
Stamp duty
Legal and conveyancing fees (purchase)
Building and pest inspection fees
Loan establishment costs (in some circumstances)
Capital improvements (renovations and additions that improve the property beyond its original condition — not repairs or maintenance)
Agent's commission and marketing on sale
Legal and conveyancing fees (sale)
Note: costs that were claimed as rental deductions during ownership reduce the cost base — you cannot deduct them twice

The record-keeping imperative: Every receipt must be retained from the date of purchase — for the life of ownership plus the ATO's review period. A $15,000 kitchen renovation in year 2 that you cannot document because you lost the invoice is $15,000 added to the capital gain, costing you $4,700+ in additional tax at 47% marginal rate after the discount. Keep everything, forever. For the full deductions and cost base guide: CGT on investment property: the complete guide.

The most effective CGT strategy available to Australian property investors is holding the property inside an SMSF and selling it after all members have commenced an account-based pension. In pension phase, the tax rate on all earnings — including capital gains — is zero.

The numbers:
Property inside SMSF, sold in pension phase for $1,400,000, purchased for $650,000
Capital gain: $750,000
CGT: $0

Same property sold personally (post-2026 cutoff):
$750,000 × 67% × 47% = $236,025 CGT

The SMSF pension phase exit saves $236,025 on a single property. This is not a loophole — it is the explicit operation of the superannuation system. The transfer balance cap ($1.9 million per member in 2025-26) limits the amount in pension phase, but for most investors this is well above the value of a single property. Full SMSF guide: SMSF Australia: the complete 2026 guide.

Hold more than 12 months: Non-negotiable. Selling within 12 months means 100% of the gain is assessable at your marginal rate — for a 47% taxpayer, this doubles the CGT compared to holding one more day past the 12-month mark.

Sell in a low-income year: CGT is taxed at your marginal rate. In the year you retire, your salary income drops to zero. The capital gain is assessed at a blended rate starting from $0 — significantly lower than if sold in a year with full salary income. On a $400,000 assessable gain, the difference between selling while earning $200,000 and selling in a retirement year with no other income can be $50,000+ in CGT. Plan the sale timing with your accountant 12 months in advance.

Offset with capital losses: Capital losses from shares, cryptocurrency, or other investment property sold at a loss can be applied against the capital gain — before the CGT discount is calculated. Losses carry forward indefinitely. A $60,000 share portfolio loss from 2020 can still reduce your 2026 property sale gain.

The 6-year main residence rule: If you previously lived in the property as your main residence, you can continue treating it as your main residence for up to 6 years after moving out (as long as you do not nominate another property as your main residence). This can produce a fully CGT-exempt exit on what would otherwise be classified as an investment property. For all CGT reduction strategies: how to reduce CGT on investment property: 7 legal strategies.

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Disclaimer: General information only, not financial, legal or tax advice. CGT rules are complex and depend on individual circumstances. The 2026 budget changes affect properties purchased after the relevant cutoff date. Australian Retirement Office does not hold an AFSL. Always obtain advice from a qualified tax adviser before making CGT-related decisions.

Related: CGT: The Complete Guide | How to Reduce CGT: 7 Legal Strategies | SMSF Australia: Complete Guide | Negative Gearing: Complete Guide | Ownership Structures