CGT for residential construction investors in Australia

What it is

Capital gains tax (CGT) applies to the sale of an Australian residential property when the property is held as an investment, used to produce income or sold by a person carrying on a business of property dealing. CGT does not apply when the property qualifies for the main residence exemption.

For residential investors building, subdividing or rebuilding, CGT outcomes turn on whether the dwelling is a main residence, when ownership starts, how the cost base is built and whether the 50% individual discount applies.

Main residence exemption

Where a dwelling is the owner's main residence (their principal place of residence, or PPOR) for the whole ownership period and is on land of two hectares or less, the capital gain on sale is generally fully exempt from CGT. A part exemption applies where the home has been partly used to produce income, or has not been the main residence for part of the ownership period.

The main residence exemption sits in subdivision 118-B of the Income Tax Assessment Act 1997. It is the single most important concession in Australian residential property tax, and it does not apply to investment properties.

Six-year absence rule

Under section 118-145 of the Income Tax Assessment Act 1997, a dwelling that has been used as a main residence can be treated as the main residence for up to six years while it is being used to produce income (rented out). If the property is not used to produce income during the absence, the unlimited absence rule applies. The clock resets if the owner moves back in and re-establishes the dwelling as their main residence before leaving again.

When CGT applies to investors

A residential investor pays CGT on any capital gain when they sell a property that has been:

• Rented out as an investment from the outset
• Acquired for the purpose of resale at a profit
• Subdivided and sold off as separate lots
• Demolished and rebuilt as a development property

Capital gains are calculated as the sale proceeds less the cost base. The cost base includes the original purchase price, stamp duty, legal fees, agent commission on sale and any capital improvements that are not deductible elsewhere.

The 50% individual discount

Individuals, trusts and partnerships are entitled to a 50% CGT discount where the asset has been held for at least 12 months before the CGT event. Companies do not receive the 50% discount but may be eligible for other concessions.

The federal government announced in the 2026-27 Budget that the 50% CGT discount for individuals, trusts and partnerships will be replaced from 1 July 2027 with a cost base indexation method and a 30% minimum tax rate on capital gains. Builders and investors with disposal plans straddling that date should confirm the timing carefully.

Subdivisions: splitting the cost base

When a property is subdivided, the original cost base is apportioned across the new lots on a reasonable basis (typically by area or market value at subdivision). Each new lot then has its own cost base for CGT purposes.

The subdivision itself does not trigger CGT. The CGT event happens on the eventual sale of each new lot. If a subdivided lot is sold while the family is still living in the main residence on the other lot, only the sold lot is subject to CGT.

Trading stock implications

If subdivision and sale activity reaches the scale of a property development business, the lots may be treated as trading stock rather than capital assets. That removes the 50% discount and brings the lots inside the ordinary income rules at full marginal rates plus GST under the margin scheme. The line between investor and developer is fact-driven and the ATO looks at the scale, frequency, business systems and profit motive of the activity.

Demolition and rebuild

Where a homeowner demolishes the existing dwelling and rebuilds, the land remains the same CGT asset (the land was the asset, not the dwelling). However, the dwelling is treated as a separate asset for the purpose of the main residence exemption. The absence rule applies differently because there is no dwelling on the land during demolition and rebuild.

The owner can choose under section 118-150 to treat the land as their main residence for up to four years before the new dwelling is built, provided the new dwelling becomes the main residence as soon as practicable after completion and is held as the main residence for at least three months.

Practical structure for builders investing on their own account

A residential builder who builds homes for sale on their own account is usually treated as carrying on a business of property dealing. Profits from the sales are ordinary income, not capital gains. GST applies to new residential premises under the GST Act, and the margin scheme may apply.

A builder who builds a home as their main residence and lives in it can rely on the main residence exemption for that dwelling on the eventual sale. The structure of ownership, the intention at the time of acquisition and the use of the dwelling during the ownership period are the decisive facts.