Capital gains tax on an investment property is not a flat rate. It is your profit, added to your income, taxed at your marginal rate, and then halved if you got the timing right. The number that lands on your assessment turns on two rules most sellers only meet afterwards.
Here is the calculation with real figures, and both of the rules that move it.
How capital gains tax is calculated
The tax is not applied to your sale price. It applies to the gain, which is what you sold for minus what the property cost you.
Your cost base is the purchase price plus the costs of acquiring and improving the property: stamp duty, legal fees, building and pest inspections, and any capital improvements. Selling costs such as agent commission come off your sale proceeds. Your capital gain is what is left after both.
Capital losses from other assets come off the gain first. If you owned the property for at least 12 months and you are an Australian resident for tax purposes, you then reduce what is left by 50%. What is left is added to your taxable income for the year of sale and taxed at your marginal rate.
That last part is where estimates go wrong. The gain stacks on top of your salary, so a large one can push you into a higher bracket than you normally sit in.
A worked example on a $890,000 sale
Take a property bought in 2019 for $520,000 and sold in 2026 for $890,000.
Buying costs were $22,000 in stamp duty, legals and inspections. During the hold, $35,000 went into a new kitchen and bathroom, which is a capital improvement. Selling costs were $21,000 in agent commission and legal fees.
Cost base: $520,000 plus $22,000 plus $35,000, so $577,000.
Now the part almost everyone misses. Over seven years the schedule claimed $38,000 in Division 43 capital works deductions. The ATO is direct about this: capital works deductions cannot be included in the cost base. Capital works you could claim come off your cost base at sale, whether or not you actually claimed them, with narrow exceptions for pre-1997 assets.
Adjusted cost base: $539,000.
Net proceeds after selling costs: $869,000. Capital gain: $330,000. Apply the 50% discount and $165,000 is added to taxable income.
On a $150,000 salary, that $165,000 stacks on top and most of it lands in the top bracket. Run across the FY2026-27 rates with the Medicare levy, the extra tax is about $74,350, an effective 45% on the discounted gain.
Division 43 comes back, Division 40 does not
Had you ignored the capital works add-back, you would have calculated a $292,000 gain, a $146,000 taxable amount and about $65,420 in tax. The real figure is $74,350.
That $8,930 gap is not a penalty. It is the capital works deductions already banked over seven years being squared up at sale.
Only the Division 43 column does this. Division 40 plant and equipment, the carpet, blinds and appliances, sits outside CGT entirely. The ATO says CGT does not apply to depreciating assets used solely for taxable purposes, including items in a rental property. Those are squared up as balancing adjustments through assessable income instead. Applying the cost base rule to a whole schedule overstates the gain.
The contract date that costs you half
The 50% discount needs 12 months of ownership. What catches people is when the clock stops.
The ATO counts the CGT event, and for property that is the date of the contract, not settlement. You also exclude the day you bought and the day of the CGT event when counting the 12 months.
A seller who signs a contract at 11 months and settles at 13 months has owned it for 11 months as far as the discount is concerned. On the sale above, that is $330,000 taxed instead of $165,000, and roughly $151,900 in tax instead of $74,350.
Same property, same price, roughly double the tax, decided by a signature date. Anyone near the 12 month mark has a reason to check the exchange date with their accountant before signing.
What changes on 1 July 2027
The 50% discount is legislated to end. Under Act No. 49 of 2026, assented 26 June 2026, it is replaced from 1 July 2027. In its place is a discount based on inflation, meaning indexation of your cost base, plus a minimum 30% tax on the gain. It applies to assets held by individuals, trusts and partnerships.
Investors in new-build property can choose at sale between the current 50% discount and the new regime. The ATO has also confirmed the changes announced in the 2026-27 Budget do not apply to Tax Time 2026.
Properties owned, or exchanged on, before 7:30pm on 12 May 2026 are grandfathered and keep the 50% discount for as long as you hold them. For everyone else the discount now has an end date. Who is affected is set out in our 2027 negative gearing and CGT playbook. The sell-or-hold arithmetic sits in should you sell before July 2027.
Four things that move the number
The 12 month test runs contract to contract. It is worth half the tax, and it turns on exchange dates rather than settlement dates.
Keep every receipt from the purchase. Stamp duty, conveyancing, building and pest, and buyers agent fees on the acquisition all sit in the cost base. Receipts you cannot find are deductions you cannot claim.
Capital improvements count, repairs do not. A new kitchen adds to the cost base. Fixing a leaking tap was already deductible against rent.
The gain is assessed in the year the contract is signed. Where income differs between financial years, the exchange date decides which year’s brackets apply.
None of this is a substitute for your accountant, and structure matters too, since a property held in a trust or an SMSF is taxed differently again.
Run your own numbers
Our capital gains tax calculator runs this on your own figures, and puts the 2027 rules beside the current discount. It stacks the gain across the brackets the same way the example above does.
The two numbers worth checking before you sell anything are the Division 43 capital works on your depreciation schedule and the date you plan to exchange. They move the result more than the sale price does.
This is general information only and not financial advice. Speak to a qualified professional before making investment decisions.
If you’re weighing whether to sell an investment property or hold it and buy the next one, book a free discovery call.
Sources
- CGT discount rules, 12 month ownership test and the contract-date CGT event: ATO, CGT discount, last updated 29 June 2026
- Capital works deductions and the cost base: ATO, Cost base adjustments for capital works, last updated 22 June 2026
- 2027 changes: Act No. 49 of 2026, assented 26 June 2026
- Worked example figures are illustrative. Tax is calculated by stacking the gain on a $150,000 salary across the FY2026-27 marginal rates including the 2% Medicare levy, not by applying a single flat rate
