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What is Australia Capital Gains Tax (CGT) on Rentals?

Updated 2026-05-28

Capital Gains Tax (CGT) in Australia is not a separate tax but is part of the income tax system. It applies to the capital gain realized when a 'CGT event,' most commonly the sale of a property, occurs.

For vacation rental owners, this tax is relevant if the property was used to produce income, even if it was also their main residence for a period. The net capital gain is added to the owner's assessable income in the year the asset is sold and is taxed at their marginal income tax rate.

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How it works

When a rental property is sold, a CGT event is triggered. The capital gain or loss is calculated by subtracting the 'cost base' from the 'capital proceeds' (the sale price).

The cost base includes the original purchase price, incidental costs like stamp duty and legal fees, and costs of capital improvements. If the property was owned for more than 12 months by an individual or a trust, they can generally apply a 50% discount to the calculated capital gain.

The final 'net capital gain' amount is then included in the owner's income tax return.

Why it matters

For vacation rental owners in Australia, CGT is a significant financial consideration that directly affects the net return on their property investment upon sale. Failing to account for CGT can lead to unexpected tax liabilities.

It is crucial for hosts to maintain meticulous records of all expenses related to purchasing, improving, and selling the property, as these details form the cost base and can reduce the taxable gain. Understanding how the main residence exemption is affected by renting out part or all of a home is also essential for accurate financial planning and compliance.

Examples

  • An investor sells their dedicated holiday let in Byron Bay after owning it for five years. They calculate the capital gain by subtracting the cost base from the sale price, apply the 50% CGT discount, and add the resulting amount to their assessable income for that year.
  • A homeowner in Perth rented out a granny flat on their property for three of the ten years they owned it. When they sell, they are only eligible for a partial main residence exemption and must calculate CGT on the portion of the capital gain attributable to the granny flat for the period it was rented.
  • A host sells their Margaret River vacation home. They add the cost of a new deck and kitchen renovation they completed two years prior to the property's cost base. This increases the cost base, thereby reducing the total capital gain and their CGT liability.
  • A family sells a beach house they purchased in 1984. Because the property was acquired before the introduction of CGT on September 20, 1985, the sale is exempt from Capital Gains Tax.

Frequently asked questions

How does the main residence exemption work for properties that were rented out?+
If you sell your main residence, you are generally exempt from CGT. However, if you have used part of your main residence to produce income, such as renting out rooms for short-term stays, you may only be entitled to a partial exemption. The portion of your capital gain that is taxable will depend on the proportion of the property used for rental and the period it was rented out.
What is included in the cost base of a rental property for CGT purposes?+
The cost base generally includes the purchase price of the property, stamp duty on the transfer, legal and real estate agent fees for the purchase and sale, and capital expenditure on improvements (e.g., renovations, extensions). It does not include expenses for which you have already claimed a tax deduction, such as maintenance costs.
Am I eligible for a CGT discount on my rental property?+
If you are an individual, trust, or complying superannuation fund and have owned the rental property for at least 12 months before selling it, you can generally discount the capital gain by 50%. Companies are not eligible for the CGT discount. This discount effectively halves the amount of the capital gain that gets added to your taxable income.
What records must I keep for CGT on my vacation rental?+
You should keep comprehensive records for the entire period of ownership and for at least five years after you sell the property. This includes contracts for purchase and sale, receipts for all incidental costs (legal fees, stamp duty), and records of all capital improvement costs. These documents are essential for correctly calculating your cost base and proving your claims to the Australian Taxation Office (ATO).
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