Capital Gains Tax on Property: A First Home Buyers Guide

Buying your first home is a huge and exciting milestone – but selling it later might come with a few unexpected tax implications. If you haven’t already wrapped your head around capital gains tax (CGT), now is the time to do so. Here’s everything you need to know about how capital gains tax works in Australia so you can avoid any potential nasty surprises down the track.

What is Capital Gains Tax?

In short, it’s a tax you pay on the profit (or ‘capital gain’) when you sell an asset – like property – for more than you originally paid for it. While it’s regarded as a separate tax, CGT is not actually a standalone levy. Instead, it’s included in your assessable income and taxed at your applicable income tax rate.

CGT applies to a number of other assets, not just real estate, including shares and investments. But for the purpose of your understanding, we’re focusing solely on how CGT works when selling a residential property in Australia.

When Do You Pay Capital Gains Tax on Property?

You only become liable for CGT when you sell a property and make a capital gain. The amount of CGT you owe will depend on how long you’ve owned the property, how much you made on the sale and whether you’re eligible for any exemptions.

A CGT event is triggered at the time you enter into a contract to sell the property – not at settlement. So, if you sign a contract in June 2025 but the settlement doesn’t happen until August, you’ll still need to report the gain in your 2024–25 income tax return.

You’ll also need to declare your capital gain in your tax return for that financial year, and it will be added to your taxable income. The higher your income, the more tax you’ll pay.

Calculating Your Capital Gain or Loss

To figure out your exact capital gain amount, you’ll need to calculate the difference between the sale price of your property and its ‘cost base’. Remember that the cost base is more than just the purchase price – it includes other costs like:

• Stamp duty paid on purchase.
• Legal and conveyancing fees.
• Agent’s commission on sale.
• Title transfer and search fees.
• Capital improvements (e.g. a new kitchen or bathroom renovation).

From there, you deduct anything you’ve already claimed (such as depreciation on investment properties) and any selling costs.

Let’s say you bought a property for $600,000 and spent $20,000 on renovations. You sell it for $750,000 and incurred $15,000 in selling costs. Your cost base would be $635,000. Your capital gain would be $115,000. This amount would be added to your taxable income for the year, unless exemptions or discounts apply.

Breaking Down CGT Discounts

If you’ve held onto the property for at least 12 months before selling, you could be eligible for the 50% CGT discount – so you’ll only pay tax on half of the capital gain.

Using the same $115,000 capital gain from the above scenario, you’d only need to include $57,500 in your assessable income if you qualify for the discount. It’s one of the simplest ways to lower your CGT liability and is great for investors who tend to hold property for several years.

But if you sell the property within 12 months, you won’t be eligible for this discount, and the full capital gain will be taxed at your marginal rate.

Main Residence Exemption

If the property you’re selling is your main place of residence, you could be fully exempt from paying CGT under the main residence exemption.

To qualify, the home has to have been your primary residence for the entire period of ownership. That means you must have lived in it, not rented it out (or only done so for a short period), and it can’t have been used to produce income in a major way.

It’s a game changer for first home buyers who live in their property for a few years before deciding to sell. It means you could pocket any capital gain without paying a cent in tax.

If you rented out your home for part of the time, a partial exemption might still apply, but you’ll need to work out the period during which it was your main residence versus the time it was used to generate rental income.

What About Property Transfers?

First-time buyers usually want to know if CGT applies when a property is transferred to a partner, parent or child. In most cases, yes – unless the transfer happens due to a marriage breakdown, inheritance or under legal arrangements like special disability trusts.

Importantly, if you gift a property or transfer it for less than market value, the ATO will still treat the transaction like it happened at market value for CGT purposes. So even if you’re not getting any money from the transfer, you could still be liable for CGT based on the property’s full market value.

What Happens if You Make a Capital Loss?

Not every property sale nets a financial gain. If you sell your property for less than the cost base, you’ll incur what’s called a ‘capital loss’.

Capital losses can’t be deducted from your regular income, but they can be used to offset future capital gains. You can carry forward these losses indefinitely and apply them in future income years when you do make a gain.

CGT and Investment Properties

If you’re turning your first home into an investment property, stay across your CGT obligations. The moment you begin renting out your home, the clock starts ticking on CGT. You’ll need to keep good records of all the following costs:

• Rental income and related expenses.
• Repairs, maintenance, capital improvements, etc.
• Periods of vacancy.

If you eventually sell the property, CGT will apply – although you might still qualify for a partial main residence exemption if you lived in the home before renting it out.

Some first home buyers also use the six-year rule: if you move out and rent your property but sell it within six years, you could still be able to claim the full main residence exemption, provided you haven’t bought another primary residence.

GST and Foreign Residents

For most first home buyers selling their existing residential property, GST won’t apply. However, if you build a new home and sell it shortly afterwards, GST may apply depending on your circumstances.

Foreign residents selling residential property in Australia are also subject to foreign resident capital gains withholding tax (FRCGWHT). If you’re an Australian resident, you’ll need to get a clearance certificate from the ATO.

CGT Tips for First Home Buyers

Here are a few strategies to help you better manage your CGT liability down the track:

1.    Keep all records: From the initial purchase contract to receipts for renovations, keep all the paperwork for at least five years after selling.
2.    Know your exemptions: Take advantage of the main residence exemption or six-year rule (if eligible).
3.    Hold for 12+ months: This unlocks the 50% CGT discount.
4.    Get expert advice: Everyone’s tax situation is different, so speak to your tax advisor or accountant to get to grips with your obligations and options.

For first home buyers, capital gains tax on property might not seem like a big concern – but it’s worth knowing where you stand from the outset. If you’re still unsure how CGT applies to your situation, read more from the ATO or speak to a qualified tax agent.