If you own an investment property in Sydney, you’ve likely noticed Capital Gains Tax (CGT) changes are back in the conversation.
Proposed changes are being modelled, including a potential reduction to the 50% CGT discount for property investors. And while nothing is legislated yet, for landlords sitting on significant gains, the real question isn’t whether the reforms will happen – but if you should act now.
So what exactly is CGT, and how does it affect investors?
Capital Gains Tax is the tax you pay on the profit of selling an asset, including an investment property. In Australia, if you’ve held that property for over 12 months, you only pay tax on half the gain – thanks to the current 50% CGT discount. In short, it only applies when you sell.
A quick CGT scenario
If you bought an investment property in 2015 for $450,000 and sell it in 2026 for $750,000, you’d have a capital gain of $300,000. Since you’ve owned it more than 12 months, you’d be eligible for the current 50% CGT discount, meaning only $150,000 of that gain is taxable.
$750,000 – $450,000 = $300,000 capital gain
$300,000 x 50% = $150,000 taxable capital gain
If your annual income is $100,000, your total taxable income for that year becomes $100,000 + $150,000 = $250,000.
With proposals on the table to reduce the discount, investors are facing a pressing question: Should I sell now under the current rules to avoid a large tax bill, or wait and see what unfolds?
Given that different goals call for different strategies, the real question is what the property was purchased for – growth, income, or something else.
A case for not selling
Selling solely in response to proposed tax changes can be a costly mistake if your focus is long-term growth.
The figures that truly matter – capital gains to date, projected growth, and tax payable under current and proposed rules – need to be carefully considered before deciding whether to sell.
Keep in mind: a larger tax bill in the future may still leave you ahead, compared with the lost growth you’d forfeit by selling prematurely.
Some other factors to weigh before deciding to sell your investment property:
- Is it in a tightly-held or high demand area?
- Is cash flow manageable?
- Does it have good long-term growth potential?
A case for selling
For some investors, selling now could be the better move – especially if the numbers stack up. Locking in gains under the current 50% CGT discount may in fact ensure you pay the lowest amount possible, rather than risking a smaller discount. This could be due to circumstances where the property has:
- Underperformed or delivered weak growth
- Required constant maintenance
- Produced poor rent
- Is in an oversupplied market
Selling can also improve immediate cash flow, or free up capital to invest elsewhere, especially if interest rates are high.
Ultimately, the decision to stay or exit comes down to individual circumstances and investment goals. The smartest financial approach is to model the numbers with your trusted accountant and/or agent, based on strategy above headlines.
Until any reforms are law, let your decisions be guided by goals and facts – not headlines or media speculation.
Prudential Real Estate Macquarie Fields | (02) 9605 5333 | macquariefields@prudential.com.au
Prudential Real Estate Narellan | (02) 4624 4400 | narellan@prudential.com.au
