How to Avoid Capital Gains on Property: Essential Tips
- Sep 7, 2025
- 15 min read
When people ask how to avoid capital gains tax on property, the real answer usually starts long before you decide to sell. While a full exemption is typically reserved for your main residence, understanding how the tax works is your first real step towards legally minimising it on any other property.
The goal is to correctly calculate your profit, which the Australian Taxation Office (ATO) calls your ‘capital gain’. Getting this right is everything.
Understanding Capital Gains Tax on Property
Before we jump into specific strategies, let’s get the basics straight. In simple terms, Capital Gains Tax (CGT) is just a tax on the profit you make from selling an asset, like your investment property. But here’s the crucial part: that profit isn't just the sale price minus what you originally paid.
The ATO calculates your capital gain by subtracting the property's 'cost base' from its sale price. The cost base is where many investors leave a huge amount of money on the table.
What Is Your Property's Cost Base?
Think of your cost base as more than just the purchase price. It’s a running tally of all the capital expenses tied to buying, holding, and eventually selling the property. A higher cost base directly lowers your taxable profit, which means less tax—it's that simple.
So, what can you include?
The original purchase price: This is the starting point.
Incidental costs: Think stamp duty, conveyancing fees, and the real estate agent’s commission when you sell.
Ownership costs: This can include council rates, land tax, and strata fees. (A quick note: these can only be added if the property was bought after 20 August 1991, and you haven't already claimed them as a tax deduction elsewhere).
Capital improvements: Any major work that adds value, like a full kitchen renovation, building a deck, or putting on a new roof.
Crucial Takeaway: Every single legitimate dollar you add to your cost base is a dollar the tax office can't touch. This is why keeping meticulous records of every single property-related expense isn't just good practice; it's essential for minimising your CGT.
A Quick Real-World Scenario
Let’s say you bought an investment property for $500,000 and sold it a few years down the track for $750,000. On the surface, it looks like a clean $250,000 capital gain.
But now let's factor in the cost base. You paid $20,000 in stamp duty and legal fees, spent $50,000 renovating the kitchen, and paid the agent $15,000 in commission.
Your total cost base is actually $585,000 ($500k + $20k + $50k + $15k). This simple adjustment slashes your taxable capital gain from $250,000 down to just $165,000.
Getting your head around this calculation is the foundation of every smart CGT strategy. For a more detailed breakdown, it's worth understanding how to calculate Capital Gains Tax properly, as this knowledge is what makes all the following strategies so effective.
To make it even clearer, here’s a quick overview of the main strategies available to you.
Key CGT Strategies at a Glance
This table summarises the primary methods Australian property owners can use to legally reduce or even eliminate their Capital Gains Tax bill.
Strategy | Who It's For | Potential Outcome |
|---|---|---|
Main Residence Exemption | Homeowners selling their primary home. | Complete CGT exemption on the sale. |
The 6-Year Rule | Homeowners temporarily renting out their main residence. | Continue treating the property as your main residence for up to 6 years, retaining the exemption. |
50% CGT Discount | Individuals and trusts holding an asset for over 12 months. | Reduces the taxable capital gain by 50%. |
Increasing the Cost Base | All property investors. | Reduces the total capital gain by including all eligible expenses. |
Timing the Sale | Investors with fluctuating income or who are nearing retirement. | Deferring the sale to a lower-income year can significantly reduce the tax payable. |
Each of these approaches has specific rules and applications, but understanding them gives you the power to plan your sale strategically and keep more of your hard-earned profit.
Your Home: The Ultimate CGT Shield
When people ask how to avoid capital gains tax on property, the conversation always starts with the main residence exemption. This is easily the most powerful strategy available, a true shield provided by the Australian Taxation Office (ATO). For most homeowners, it means paying absolutely zero CGT when they sell.
It sounds simple enough: if the property you sold was your primary home the whole time you owned it, any profit is usually tax-free. But as with most things tax-related, the devil is in the detail. The ATO has some pretty specific ideas about what truly qualifies as a 'main residence'.
What Does the ATO Consider a Main Residence?
To get the green light from the ATO, you have to prove the property was genuinely your home. This goes far beyond just having your name on the title or staying there occasionally; it’s about establishing it as the centre of your domestic life.
The ATO will look at a few key factors to see if your claim stacks up:
You and your family actually live in it: This is the big one. It's where you sleep, eat, and carry on your day-to-day life.
Your personal belongings are there: All your furniture, clothes, and other possessions should be in the home.
It’s your mailing address: This is the address you use for banks, Centrelink, and other official correspondence.
It’s your address on the electoral roll: This is a strong piece of evidence that the ATO takes very seriously.
You’re also expected to move into the property as soon as you practicably can after buying it. If you can confidently tick these boxes for the entire time you owned the place, you're on the right track for a full exemption.
Expert Tip: The ATO looks for a consistent pattern of behaviour. If you buy a place, quickly change your address on a few documents, and then sell it a short time later, it's not going to pass the "sniff test." Authenticity is key.
Common Scenarios That Can Catch You Out
While the main residence exemption is fantastic, certain situations can complicate things and lead to a partial CGT bill. It pays to know about these potential traps ahead of time.
Using Your Home to Produce Income
Did you run a business from home or rent out a room? If you used a part of your house exclusively for business and claimed tax deductions for it (like a portion of your mortgage interest), that section of your home might not qualify for the full exemption.
For example, if 15% of your home's floor space was a dedicated home office, you could find yourself paying CGT on 15% of your capital gain. For a much deeper look into how this works, check out our detailed guide on the CGT Exemption for your Main Residence.
Property on More Than Two Hectares
The exemption generally only covers your house and the land around it up to a maximum of two hectares (which is about five acres). If your property is bigger than that, the land over the two-hectare limit is usually subject to CGT. The exemption is strictly for the land used for your private, domestic life.
A Practical Example of the Exemption in Action
Let’s look at a really common scenario. Sarah and Tom bought their family home in a Brisbane suburb for $600,000 back in 2018. They lived there with their two kids for seven years straight.
During that time:
They never rented out any part of the house.
They didn't operate a business from the property.
The block of land was well under two hectares.
In 2025, they decide it’s time to upgrade and sell the house for $950,000, making a capital gain of $350,000.
Because the property was their main residence for the entire ownership period and they met all the conditions, they qualify for the full exemption. That means the entire $350,000 profit is theirs to keep, completely tax-free. It's a perfect illustration of just how financially powerful this exemption can be when you get it right.
How to Keep Your Exemption When You Move Out
Just because you're moving out of your home doesn't mean you automatically lose your valuable main residence exemption. Life happens. You might get a great job offer in another city, decide to travel, or need to move temporarily for family reasons. Thankfully, the Australian Taxation Office (ATO) has a powerful provision that every homeowner should know about: the 'six-year rule'.
This rule is a genuine game-changer. It allows you to move out of your home, rent it out to generate income, and still sell it completely free of Capital Gains Tax (CGT) down the track. But, and this is a big but, you have to meet a few crucial conditions to qualify.
Understanding the Six-Year Rule
At its core, the principle is straightforward. You can treat your property as your main residence for CGT purposes for up to six years after you stop living there, as long as it's being used to produce income (i.e., you've got tenants in). Even better, if you move back in during that time, the six-year clock resets. You could potentially do it all over again in the future.
Here’s the most important catch: you cannot nominate another property as your main residence while you're away. If you buy and live in a new home, you'll have to choose which property gets the exemption for that overlapping period. The ATO won't let you have two main residences at the same time.
A Practical Scenario Using the Six-Year Rule
Let’s look at a real-world example. Meet Liam. He bought his Melbourne apartment and lived in it for four years. Then, a fantastic three-year work contract came up in Perth. Instead of selling his apartment, he decided to rent it out.
During his three years in Perth, Liam rented a place to live but didn't buy another property. He continued to treat his Melbourne apartment as his nominated main residence.
When his contract ended, Liam decided to sell the Melbourne apartment. Even though it was rented for three years, his absence was well within the six-year limit. Because he didn't nominate another main residence, he can claim the full exemption and pay zero CGT on the sale. A brilliant outcome.
What Happens if You Exceed Six Years?
The six-year limit is a hard deadline. If your income-producing absence stretches beyond this period, you will be up for a partial CGT bill. The tax is calculated based on the proportion of time the property was rented out after the six-year exemption period ran out.
For instance, what if Liam’s contract was extended and he ended up renting his apartment out for a total of eight years before selling? The calculation would change:
The first six years of his absence are exempt under the rule.
The final two years are subject to CGT.
His capital gain would be apportioned, meaning he'd only pay tax on the gain attributable to those last two years. While managing CGT is crucial, don't forget about the expenses you can claim while the property is tenanted. To make sure you're getting the most out of your annual returns, check out our guide on tax deductions for rental properties.
Key Takeaway: The six-year rule offers incredible flexibility. It lets you turn your home into a temporary income-producing asset without immediately sacrificing the main residence exemption, provided you plan carefully and stick to the rules.
Smart Tax Tactics for Investment Properties
For property investors, the main residence exemption is off the table, but that doesn't mean you're destined for a hefty tax bill. There are several powerful, ATO-approved strategies that can seriously reduce the Capital Gains Tax (CGT) you'll have to pay. Moving beyond the rules for homeowners, these tactics are designed specifically for your investment portfolio.
The key is to shift your mindset from just selling a property to strategically managing a CGT event. With some careful planning, you can legally keep much more of your profit where it belongs – with you.
The 50 Percent CGT Discount: Your Greatest Ally
Patience is more than a virtue in property investment; it’s a direct path to a lower tax bill. The 50% CGT discount is arguably the most valuable tool for long-term investors.
The rule is beautifully simple: if you hold an investment property for more than 12 months before selling, you can instantly cut your taxable capital gain in half.
This isn't just some minor tweak; it’s a fundamental strategy that can save you tens of thousands of dollars. The discount is available to individuals, trusts, and complying super funds, so it's widely accessible. It's the ATO's way of acknowledging the long-term nature of property investing and rewarding those who aren't just in it for a quick flip.
Let's look at a clear example. Imagine you bought an investment property for $500,000. Five years later, you sell it for $600,000, giving you a gross profit of $100,000. After you factor in costs like $15,000 for stamp duty when you bought it and $12,500 in agent commissions when you sold, your actual capital gain is $72,500.
Because you held the property for over 12 months, you can apply the 50% discount. This slashes your taxable gain to just $36,250. This much smaller amount is then added to your income for the year, which is a far more manageable figure than the full gain.
The Art of Timing Your Sale
Another smart tactic is to think carefully about when you sell. A capital gain isn't taxed on its own; it gets added to your assessable income for the financial year in which you sign the contract of sale (note: this is the contract date, not the settlement date). This means your marginal tax rate for that year is what determines how much tax you pay on the gain.
If you sell in a year when your other income is high, that profit gets taxed at your highest marginal rate. But if you can time the sale for a year when your income is lower, the tax bite will be significantly less.
Consider these scenarios for strategic timing:
Approaching Retirement: Selling after you've stopped working usually means your income is substantially lower, pushing your capital gain into a much friendlier tax bracket.
A Career Break or Sabbatical: If you're planning to take extended time off work, this could be the perfect window to sell and realise a capital gain.
Starting a New Business: In the early years of a new venture, personal income is often lower, providing a tax-effective opportunity to offload an asset.
Strategic Insight: A common mistake is focusing only on the property market's peaks and troughs. An equally important consideration is your personal financial cycle. Selling for a slightly lower price in a low-income year can sometimes result in a better after-tax outcome than selling at the market's peak in a high-income year.
Using Capital Losses to Your Advantage
Your property portfolio doesn't exist in a vacuum. If you have other investments, like shares, you can use any capital losses from those assets to offset capital gains from your property. This strategy, often called "tax-loss harvesting," is a way to balance your overall investment performance from a tax perspective.
The process is quite logical:
First, you offset any capital losses against capital gains you've made in the same financial year.
Crucially, you must apply these losses to your gains before you apply the 50% CGT discount.
If you still have losses left over after wiping out all your current year gains, you can carry them forward indefinitely to offset gains in future years.
Beyond capital gains strategies, understanding how to maximise your annual returns through savvy expense management is also essential. A great place to start is by learning about rental property tax deductions to ensure you are claiming everything you're entitled to. Furthermore, one of the most significant deductions is often property depreciation, a topic we cover in detail in our article on understanding depreciation on an investment property.
Advanced Ownership Structures to Reduce Tax
For savvy investors looking to truly sharpen their portfolio's tax efficiency, the game changes. The question is no longer just what you own, but how you own it. The legal structure holding your property can dramatically alter your final tax bill, opening up savings well beyond the standard 50% discount.
This is where smart, long-term planning really pays off. Choosing the right ownership structure from day one can set you up for a much better tax outcome when it's time to sell.
Holding Property in a Self-Managed Super Fund (SMSF)
One of the most powerful structures out there is the Self-Managed Super Fund (SMSF). While setting one up involves strict compliance and rules, the potential CGT benefits are unmatched, especially as you get closer to retirement.
Here’s a quick look at how the tax works inside an SMSF:
Accumulation Phase: While your fund is growing, any capital gain from selling a property held for over 12 months is taxed at a concessional rate of just 10%. Compare that to personal marginal tax rates that can climb as high as 45% (plus the Medicare levy), and the savings are obvious.
Pension Phase: This is where the real magic happens. Once you retire and your SMSF switches to the pension phase, the capital gains tax on assets sold to fund your retirement can drop to 0%. That’s a complete tax exemption on your profit.
Heads Up: Using an SMSF for property is a complex strategy. There are strict rules around borrowing (known as limited recourse borrowing arrangements), and the property must meet the 'sole purpose test' of providing retirement benefits. It's not something to jump into lightly and absolutely requires professional guidance.
Comparing Trusts and Company Structures
Outside of super, investors often turn to trusts or companies to hold their property assets. Each has its own pros and cons, and the right choice really depends on your personal situation and what you want to achieve long-term.
Trusts (Especially Discretionary/Family Trusts)
A trust isn’t a separate legal entity like a company; it's a relationship where a trustee holds assets for beneficiaries. For property investors, they offer fantastic flexibility.
Distributing Income and Gains: The standout benefit of a discretionary trust is the power to distribute rental income and capital gains in the most tax-effective way. For instance, you could distribute a capital gain (after applying the 50% discount) to a family member on a lower income, who then pays tax at their much lower marginal rate.
Asset Protection: Trusts can also add a valuable layer of protection, separating the property from the personal assets of the beneficiaries.
Companies
Owning property through a company is another path, though it's often less common for residential investors because of how it handles CGT.
Fixed Tax Rate: A company pays tax at the current corporate rate (30%, or 25% for eligible small businesses). This can be a good move if your personal marginal tax rate is higher.
No CGT Discount: Here’s the major catch. Companies are not eligible for the 50% CGT discount. The entire capital gain gets taxed at the corporate rate, which can easily lead to a bigger tax bill than if you held the property as an individual or in a trust. For a deeper dive, check out our guide on buying a property through a trust structure.
The Role of Negative Gearing in Your CGT Strategy
Negative gearing gets a lot of press for its ability to reduce your annual taxable income, but its real power comes alive when you pair it with a long-term capital growth plan.
When a property is negatively geared, its expenses (like loan interest and repairs) are more than its rental income. This creates a paper loss that you can then offset against your other income, like your salary.
While this gives you an immediate tax break year after year, the ultimate goal is for the property's value to climb. It’s a classic Australian strategy: use gearing to reduce your income tax now, all while aiming for a future capital gain that will benefit from the 50% CGT discount. This two-pronged approach makes the property more affordable to hold while you wait for its value to grow.
Got Questions? We’ve Got Answers
Navigating the world of Capital Gains Tax can feel like wading through mud. There are plenty of tricky rules and specific scenarios that pop up. Here are some of the most common questions we get from property owners looking to legally trim their CGT bill.
What Records Do I Absolutely Need to Keep?
This is non-negotiable. If you want to minimise your CGT, you have to be a meticulous record-keeper. Think of it this way: every document you keep is potential money back in your pocket. You’ll need everything from the property's purchase and sale, including contracts of sale, stamp duty receipts, and all your legal bills.
But it doesn't stop there. Just as crucial are the receipts for any capital costs you've paid for while you owned the property. This covers major expenses like a full kitchen renovation, fixing structural issues, or even adding a new deck. These costs are added to your ‘cost base,’ which is the magic number that directly shrinks your taxable profit.
If you can't show the ATO the receipts, they simply won't let you claim the expense. That means you’ll end up paying far more tax than you legally need to.
Does CGT Apply if I Inherit a Property?
Yes, it often does, and the rules are quite specific. If you inherit a home that was the deceased's main residence right up until they passed away, you might get a lucky break. If you sell that property within two years, you could be completely exempt from CGT.
However, things get more complicated if the property was an investment, or if you decide to hold onto it for longer than two years and rent it out. In those situations, a different set of CGT rules kick in. Typically, the property's starting cost base is considered its market value on the date the original owner passed away.
A Word of Advice: The tax rules for inherited properties are notoriously complex. With so much at stake financially, getting professional advice from a tax agent isn't just a good idea—it's essential to make sure you're doing everything by the book.
Can I Claim Two Properties as My Main Residence?
Unfortunately, no. The ATO is crystal clear on this one: you can only have one main residence at any given time for tax purposes. If you own more than one home, you need to nominate which one is your primary place of residence.
But there's a handy exception called the 'six-month overlap rule'. This is a lifesaver when you buy a new home before you've managed to sell your old one. It lets you treat both properties as your main residence for up to six months, giving you a tax-free grace period.
To qualify, you need to have lived in your old home for at least three continuous months in the year before you sell it, and it can't have been used to generate income during that time. It’s a practical rule designed to help homeowners who are transitioning between properties.
• Need assistance? We offer free online consultations:
– LINE: barontax
– WhatsApp: 0490 925 969
– Email: info@baronaccounting.com
– Or use the live chat on our website at www.baronaccounting.com
📌 Curious about your tax refund? Try our free calculator: 👉 www.baronaccounting.com/tax-estimate
For more resources and expert tax insights, visit our homepage: 🌐 www.baronaccounting.com
Comments