Capital Gains Tax & Negative Gearing: The Complete Property Investor's Guide

Capital Gains Tax and negative gearing sit at the very centre of Australian property investment strategy — yet they remain among the most misunderstood areas of tax law. Get them right and you can legally shelter thousands of dollars from the ATO each year. Get them wrong and you may face unexpected tax bills, missed concessions, or even ATO audit exposure.

This guide explains both concepts in plain English, outlines the key concessions available to property investors, and flags the most common mistakes we see as specialist property accountants.

Part 1: Capital Gains Tax — How It Works

Capital Gains Tax (CGT) is not a separate tax — it's a component of your income tax. When you sell a capital asset (like an investment property) for more than its cost base, the gain is included in your assessable income for that year and taxed at your marginal rate.

What is the Cost Base?

The cost base is the starting point for calculating your capital gain. It includes more than just the purchase price — it also includes:

• Purchase price — the amount you paid for the property
• Acquisition costs — stamp duty, legal fees, conveyancing costs, and loan establishment fees
• Capital improvements — structural renovations, extensions, and permanent upgrades (not repairs or maintenance, which are deductible separately)
• Disposal costs — agent's commission, legal fees, marketing costs when you sell
• Non-deductible borrowing costs — if you didn't claim them as deductions during ownership

Getting the cost base right is crucial — every additional dollar in the cost base reduces your capital gain dollar-for-dollar. Many investors inadvertently inflate their CGT bill by failing to include legitimate cost base items.

The 50% CGT Discount — The Single Biggest Concession

If you hold an investment property for more than 12 months before selling, you're entitled to a 50% discount on the capital gain (for individuals and trusts). This effectively halves the amount of gain included in your income.

Companies do not receive the 50% CGT discount — only individuals, trusts, and complying superannuation funds (which receive a one-third discount). This is one of the key reasons why holding investment properties personally or in a family trust (rather than a company) is often preferred for long-term buy-and-hold strategies.

Main Residence Exemption

Your principal place of residence (your "home") is generally fully exempt from CGT. However, several situations can partial or fully remove this exemption:

• Using your home for income — renting out rooms or running a business from home may proportionally reduce the exemption
• Absence rule — if you move out and rent the property, you can treat it as your main residence for up to 6 years (the "6-year rule"), preserving the exemption — but only if you don't nominate another property as your main residence
• Land area — if your land exceeds 2 hectares, the excess may not be exempt
• Foreign residents — since 9 May 2017, foreign residents are no longer entitled to the main residence CGT exemption on sale

When CGT Applies to Property

• Selling an investment property
• Converting a property from personal use to income-producing use (or vice versa) — a "deemed disposal" event
• Transferring property between entities (e.g., from personal name to a trust)
• Subdividing land — each new lot may trigger a CGT event
• Receiving insurance proceeds above cost base
• Compulsory acquisition by the government

CGT on Inherited Property

Inherited property receives special treatment. Generally, the beneficiary is taken to have acquired the property at the date of the deceased's death at the deceased's cost base (or market value, in certain circumstances). The 12-month holding period also includes the deceased's ownership period.

If the deceased acquired the property before 20 September 1985 (pre-CGT), the beneficiary is treated as acquiring it at market value at the date of death — a significant concession.

Part 2: Negative Gearing — What It Is and How It Works

A property is "negatively geared" when the costs of holding it (interest, rates, management fees, insurance, repairs, depreciation) exceed the rental income it generates. The resulting loss can be deducted against your other income — including wages — reducing your overall tax liability.

What Expenses Are Deductible?

• Loan interest — the biggest deduction for most investors
• Council rates and water rates
• Land tax
• Property management fees
• Insurance premiums (landlord, building, contents)
• Repairs and maintenance — not capital improvements (those go into the cost base)
• Depreciation — on the building structure (Division 43) and depreciable plant and equipment (Division 40)
• Strata/body corporate levies
• Advertising for tenants
• Bank charges on the rental account

Depreciation: The "Invisible" Deduction Most Investors Miss

A Quantity Surveyor prepares a Depreciation Schedule covering Division 43 (building structure, 2.5%/year over 40 years) and Division 40 (carpets, blinds, appliances — depreciated over effective life). For a typical $650,000 apartment, a depreciation schedule commonly generates $8,000–$15,000 of additional deductions in the first year.

Part 3: CGT Timing Strategies

• Hold past 12 months — access the 50% CGT discount. Never sell before the 12-month anniversary if you can avoid it.
• Sell in a low-income year — selling in a year when your other income is lower reduces the marginal rate applied to the gain.
• Delay settlement — the CGT event occurs at contract date. A June contract vs a July contract shifts the tax bill 12 months.
• Offset gains with losses — capital losses from other assets are applied against capital gains before the 50% discount.
• Distribute gains via trust — trustees can distribute the discounted gain to beneficiaries with the lowest marginal rates.

Part 4: Land Tax in Victoria

Land tax is levied annually on the unimproved value of land you own above a threshold. In Victoria, investment properties attract land tax while your principal place of residence is exempt. Trusts holding property are taxed at higher surcharge trust rates — a key structural consideration. Critically, land tax is deductible as a rental property expense.

Part 5: Common Mistakes Property Investors Make

Negative Gearing & CGT Working Together

The classic Australian property investment thesis: buy with negative gearing (annual losses reduce income tax while you hold), hold for the long term as the property appreciates, then sell after 12 months with the 50% CGT discount applied. The ATO effectively funded part of your holding costs through deductions, and you receive the capital gain at a reduced effective rate.