Capital Gains Tax and Negative Gearing: What Property Investors Need to Understand Right Now

Many people don’t properly understand what Capital Gains Tax and Negative Gearing actually mean, or how each are formulated.

With budget night rumour flying, it’s prudent to assume that both are going to change soon. The Albanese government may have entered their second term with a promise that “negative gearing changes were ‘off the table'”, but here we are in May, anticipating change.

Today’s blog explains what each mean. Next week, I’ll break down the announced changes and discuss how they will impact Australian investors.

I covered negative gearing in this blog some time ago, and recently I created a video with my Friday apprentice, Christopher to explain negative gearing in very basic terms.

Capital gains tax, often shortened to CGT, is one of the most misunderstood taxes in Australian property. Many buyers assume it’s a separate tax altogether, but in reality, it’s a tax on the profit you make when you sell an asset, including real estate.

In simple terms, if an investor purchases an investment property for $700,000 and later sells it for $1,000,000, the gain is $300,000 before selling costs and adjustments. The Australian Taxation Office treats that profit as income, and it becomes part of the seller’s taxable income in the financial year you sell.

The good news for Australian property owners over the last 27 years has related to the concessions currently available. If the property has been held for more than 12 months, most individual owners are entitled to a 50 per cent CGT discount. Using the example above, only half of the capital gain would be added to your assessable income. The actual tax payable then depends on the seller’s marginal tax rate.

Importantly, a principal place of residence is generally exempt from capital gains tax, provided it genuinely meets the ATO’s requirements as a family home. This is one of the reasons home ownership is such a powerful long-term wealth strategy in Australia.

Investors also need to understand that renovations, subdivision projects, short ownership periods and frequent buying and selling can complicate the tax treatment significantly. Records matter enormously. Purchase costs, stamp duty, legal fees, renovation invoices and selling expenses can all influence the final capital gain calculation.

In our experience, sophisticated investors don’t make decisions based solely on avoiding tax. Paying capital gains tax often means an investor has achieved strong growth. The focus should always be on quality asset selection, strategic timing and obtaining excellent accounting advice before making any selling decision.