Capital gains tax on investment property: a 6-step worked example

Capital gains tax is the line item investors most often estimate last and most often estimate wrong. The mechanics are not complicated, but there are six distinct steps and skipping any of them changes the answer by tens of thousands. This article walks through the lot using one example: a property bought for $700,000 in 2018 and sold for $1,050,000 in 2026, held by an individual owner on a 37% marginal rate.

Step 1: Work out the cost base

Cost base is what the property cost you to own, not just what you paid the vendor. It includes the purchase price, the costs you paid to acquire the asset (stamp duty, conveyancing, buyer's agent fees, loan establishment costs that aren't separately deductible), and any capital improvements made over the holding period. Routine maintenance does not count, because that has already been claimed as a deduction against rental income.

For our example, stamp duty and legal at acquisition came to $35,000, and a kitchen and bathroom refresh during the hold added $20,000 of capital improvements. Cost base is therefore $700,000 + $35,000 + $20,000 = $755,000. Keep the receipts. The ATO will ask for them if you ever get audited, and reconstructing eight years of records from memory is a bad way to spend a weekend.

Step 2: Work out the net sale proceeds

Net sale proceeds is the sale price minus the costs of selling. Agent commission is the largest line, typically 1.8% to 2.5% of the sale price plus marketing. Add conveyancing on the way out and any auctioneer or styling fees. In our example the property sold for $1,050,000 with $25,000 of total sale costs, leaving net proceeds of $1,025,000.

Step 3: Calculate the capital gain

Capital gain is net sale proceeds minus cost base. For the example: $1,025,000 − $755,000 = $270,000. If the answer is negative, you have a capital loss instead of a gain. There's no CGT to pay on a loss, but the loss is not wasted either; it carries forward indefinitely and offsets future capital gains from any source, not just property. Plenty of investors who sold a unit at a loss in a flat year discover years later that the carried-forward loss wipes out the tax on a share-portfolio rebalance.

Step 4: Check discount eligibility

The CGT discount is the single biggest lever in the calculation and the one most often misapplied. Three rules matter. An individual who has held the asset for more than twelve months gets a 50% discount on the gain. A self-managed super fund in accumulation phase gets 33⅓%. A company gets nothing. Held under twelve months and the discount is zero regardless of who owns it.

The twelve-month clock runs from contract date to contract date, not settlement to settlement, and that distinction can matter for properties bought and sold close to the line. Our example owner is an individual who held for roughly eight years, so the 50% discount applies cleanly.

Step 5: Calculate the taxable gain

Taxable gain is the capital gain multiplied by one minus the discount factor. With a 50% discount, half the gain is taxed and half is tax-free. For the example: $270,000 × (1 − 0.5) = $135,000. The other $135,000 is the part of the return the tax system rewards you for holding long-term, and it's the reason most Australian property investors aim to hold across the twelve-month line at minimum.

Step 6: Apply your marginal rate

The taxable gain is added to your other taxable income for the year of sale and taxed at your marginal rate. Our owner sits at 37%, so the CGT payable is $135,000 × 37% = $49,950. Net cash from sale after CGT is $1,025,000 − $755,000 − $49,950 = $220,050, which is the figure that actually lands in the bank.

One trap to flag. A $135,000 taxable gain dropped on top of an average salary will often push part of the gain into the next bracket, so the "marginal rate" you apply may not be the rate on your last dollar of salary. For a serious sale, model the year of sale on its own with the gain included rather than assuming a flat marginal rate. The CGT calculator uses a single marginal rate by design, which is fine for a first-pass estimate and not a substitute for a tax-time projection.

What the calculator does not model

Five things sit outside the simplified model and any of them could change the answer materially. The main-residence exemption wipes out CGT on a property that has only ever been your home; most owner-occupiers will pay no CGT on a sale at all. The six-year rule lets a former main residence stay CGT-exempt for up to six years after you move out and rent it, provided you haven't nominated another property as your main residence in the meantime. Partial main-residence days handle the case where a property switches between being lived in and being let, and the calculation is pro-rata across days held.

Prior-year capital losses from any source come off the gain before the discount is applied, which is a meaningful saving many owners forget about. And the Medicare levy of 2% sits on top of the marginal rate for most taxpayers, which the calculator quietly omits to keep the inputs short. For any of those situations the right move is the ATO capital gains tax page or a registered tax agent. The cost of an hour with an agent is trivial against a five-figure CGT bill.

Where this fits in the bigger picture

Capital gains tax is the back end of an investment thesis the front end of which is yield and growth. If you're still sizing up whether a property pencils in the first place, the rental yield calculator is the tool to start with, and the understanding rental yield article explains why net yield is the figure that should drive the decision rather than the gross yield in the listing.

For the cash-flow side over the holding period, the negative gearing in 2026 piece pairs naturally with this one; the 50% CGT discount and the deductibility of rental losses are two halves of the same tax conversation, and modelling either without the other produces a misleading answer. Run the numbers under the current rules and a tighter scenario before committing capital.