Every successful property investor needs an exit strategy. Whether you're planning to sell for capital gains, hold for long-term income, or pass properties to family members, understanding your options and their tax implications is crucial. This comprehensive guide covers the main exit strategies available to Australian property investors and how to minimise capital gains tax (CGT) when you sell.
What Is an Exit Strategy?
An exit strategy is your plan for how and when you'll realise the value from your investment property. It's not just about selling - your exit strategy should align with your financial goals, timeline, and tax situation.
Having a clear exit strategy helps you:
- Make better purchasing decisions upfront
- Time your sales for maximum tax efficiency
- Plan for major life events and cash flow needs
- Optimise your overall investment portfolio
- Prepare for changing market conditions
Exit Strategy vs Exit Plan
Your exit strategy is your overall approach (e.g., "sell after 10 years for capital growth"), while your exit plan is the specific implementation (e.g., "list property in March 2026 after CGT discount eligibility").
Common Property Exit Strategies
Australian property investors typically use one of several exit strategies, each with different risk profiles and tax implications:
1. Capital Growth and Sale
The most common strategy involves holding a property for capital appreciation then selling for a profit. This strategy works best in growth markets and requires patience.
Best for: Investors seeking maximum returns, those with other income sources, investors who can afford negative gearing
Typical timeline: 7-15 years
2. Buy, Hold, and Rent
Long-term hold strategy focusing on rental income and gradual capital appreciation. Properties may eventually be sold or passed to beneficiaries.
Best for: Income-focused investors, retirees, those building wealth for retirement
Typical timeline: 15+ years or indefinite
3. Value-Add and Flip
Purchase undervalued properties, renovate or develop them, then sell quickly for profit. Higher risk but potentially higher returns.
Best for: Experienced investors, those with renovation skills, investors with available capital
Typical timeline: 6 months to 3 years
4. Estate Planning Transfer
Hold properties until death to pass to beneficiaries, who receive a "stepped-up basis" for CGT purposes.
Best for: Wealthy investors focused on inter-generational wealth transfer
Typical timeline: Until death
Exit Strategy Example
Sarah's Strategy: Purchase a 2-bedroom unit in Brisbane for $450,000 in 2025. Hold for 8 years while negatively geared, then sell in 2033.
Expected Outcomes:
- Property value in 2033: $650,000 (5% annual growth)
- Capital gain: $200,000
- CGT discount applies (held >12 months)
- Taxable capital gain: $100,000 (50% discount)
- Tax saved through negative gearing: ~$45,000
Understanding Capital Gains Tax (CGT)
Capital Gains Tax is the tax you pay on the profit when you sell an investment property. In Australia, CGT is not a separate tax but forms part of your income tax. Understanding how CGT works is essential for timing your property sales effectively.
How CGT Is Calculated
Your capital gain is the difference between what you paid for the property (including purchase costs) and what you sold it for (minus selling costs).
Basic Formula:
Capital Gain = Sale Price - Purchase Price - Purchase Costs - Improvement Costs - Selling Costs
Purchase Costs (Can Be Deducted)
- Stamp duty
- Legal fees
- Conveyancing costs
- Building and pest inspections
- Loan establishment fees
- Property valuations
Selling Costs (Can Be Deducted)
- Real estate agent commissions
- Legal and conveyancing fees
- Marketing and advertising costs
- Auctioneer fees
- Property styling or minor repairs for sale
CGT Calculation Example
Property Details:
- Purchase price (2020): $500,000
- Purchase costs: $25,000 (stamp duty, legal fees)
- Renovation costs: $30,000
- Sale price (2025): $650,000
- Selling costs: $20,000 (agent, legal fees)
Capital Gain Calculation:
$650,000 - $500,000 - $25,000 - $30,000 - $20,000 = $75,000
This $75,000 capital gain would be added to your assessable income for tax purposes.
The CGT Discount and 12-Month Rule
One of the most significant benefits available to Australian property investors is the CGT discount, which can halve your capital gains tax liability.
50% CGT Discount
If you hold an investment property for more than 12 months, you're eligible for a 50% discount on the capital gains tax. This means only half of your capital gain is added to your assessable income.
The 12-Month Rule
The 12-month period starts from the date of settlement (when you legally own the property), not the contract date. Selling even one day before the 12-month anniversary means you lose the entire 50% discount.
CGT Discount Impact
Scenario: Capital gain of $100,000, investor in 37% tax bracket
Without CGT Discount (sold before 12 months):
- Taxable capital gain: $100,000
- Tax payable: $37,000
- Net gain after tax: $63,000
With CGT Discount (held over 12 months):
- Taxable capital gain: $50,000 (50% discount)
- Tax payable: $18,500
- Net gain after tax: $81,500
Tax saving: $18,500 - just for holding an extra day!
CGT Strategies for Property Investors
Smart investors use various strategies to minimise their CGT liability while maximising their returns:
1. Timing Your Sales
The year you sell can significantly impact your tax bill:
- Low income years: Sell when your other income is lower (e.g., between jobs, sabbatical, retirement)
- Split across financial years: Use contracts and settlements to manage which year the gain is recognised
- Offset with losses: Sell losing investments in the same year to offset gains
2. The Six-Year Rule
If your investment property was previously your principal place of residence (PPOR), you may be eligible for full or partial CGT exemption under the six-year rule.
How it works:
- Live in the property as your main residence initially
- Move out and rent it as an investment property
- For up to six years, you can choose to treat it as your PPOR for CGT purposes
- No CGT payable if sold within this period
3. Main Residence Exemption
Your principal place of residence is generally exempt from CGT. Some investors use strategies like:
- Living in investment properties before renting them out
- Moving back into investment properties before selling
- Building on investment land and living in the new dwelling
PPOR Strategy Risks
The ATO closely scrutinises PPOR claims. You must genuinely live in the property as your main residence - simply changing your address isn't sufficient. Penalties for false claims can be severe.
Advanced CGT Minimisation Techniques
Sophisticated investors may use more complex strategies to reduce CGT liability:
1. Instalment Sales (Vendor Finance)
Instead of receiving the full purchase price upfront, you can spread the capital gain over several years through vendor financing arrangements.
2. Property Trusts and Entities
Using discretionary trusts, companies, or SMSFs can provide flexibility in managing CGT, though each structure has different rules and implications.
3. Partial Sales and Subdivisions
Selling part of a property (e.g., subdividing and selling one block) can help manage the timing and amount of capital gains.
4. Renovation vs Improvement
Understanding the difference between repairs (tax deductible) and improvements (added to cost base for CGT) can optimise your tax position.
Professional Advice Essential
Advanced CGT strategies require careful planning and professional advice. Tax laws are complex and change frequently. Always consult with qualified tax professionals before implementing these strategies.
When to Hold vs When to Sell
Deciding whether to hold or sell an investment property involves multiple factors beyond just tax considerations:
Reasons to Hold Longer
- Strong rental demand: Good cash flow and low vacancy rates
- Growth potential: Area undergoing development or gentrification
- Tax benefits: Still receiving valuable negative gearing deductions
- Market timing: Waiting for better market conditions
- 12-month rule: Approaching CGT discount eligibility
Reasons to Sell
- Market peaks: Property values have reached historical highs
- Poor fundamentals: Declining rental demand or oversupply
- High maintenance: Older properties requiring expensive repairs
- Rebalancing: Need to diversify portfolio or release equity
- Life changes: Need cash for other opportunities or expenses
Hold vs Sell Analysis
Property: 3-bedroom house in outer Melbourne, purchased 2018 for $420,000, now worth $580,000
Current Situation:
- Rental income: $380/week
- Net cash flow: -$85/week
- Capital gain if sold: $160,000
- CGT payable: ~$30,000 (with discount)
Decision Factors:
- Area has strong population growth ✓
- New train line opening in 2026 ✓
- Property needs new roof (~$15,000) ✗
- Investor wants to buy in different location ✓
Recommendation: Hold until train line opens, then reassess. The infrastructure development could add significant value.
Estate Planning and Property
For long-term wealth building, consider how your property portfolio fits into your estate planning:
Benefits of Holding Until Death
- Stepped-up basis: Beneficiaries inherit properties at market value, not your original cost base
- No CGT payable: Capital gains are generally not taxed on death
- Continued income: Properties continue generating rental income
- Inflation protection: Property values typically increase with inflation
Risks of Never Selling
- Concentration risk: Too much wealth tied up in property
- Liquidity issues: Cannot access capital when needed
- Management burden: Properties require ongoing management
- Market risk: Property values can decline
Record Keeping for CGT
Proper record keeping is essential for accurate CGT calculations and ATO compliance:
Essential Records to Keep
- Purchase contracts and settlement statements
- All receipts for purchase costs (stamp duty, legal fees, inspections)
- Records of capital improvements (receipts, contracts, invoices)
- Depreciation schedules and claims
- Sale contracts and settlement statements
- All selling costs receipts
How Long to Keep Records
The ATO requires you to keep CGT records for five years after you sell the property. However, it's wise to keep them permanently as part of your financial records.
Lost Records
If you've lost original records, you may still be able to claim deductions by obtaining duplicates from solicitors, banks, or government offices. However, this can be time-consuming and expensive, so maintain good records from the start.
Market Timing and Exit Strategy
While timing the market perfectly is impossible, understanding market cycles can inform your exit strategy:
Market Indicators to Watch
- Interest rates: Rising rates can slow price growth
- Population growth: Drives demand in specific areas
- Infrastructure development: Can significantly impact values
- Supply levels: Oversupply can depress prices and rents
- Economic conditions: Employment levels affect demand
Exit Strategy Flexibility
The best exit strategies maintain flexibility to adapt to changing circumstances:
- Set multiple potential exit dates rather than one fixed date
- Regular portfolio reviews (annually or bi-annually)
- Monitor both local and broader market conditions
- Have backup plans for different scenarios
- Consider partial exits (selling some properties, keeping others)
The Importance of Professional Advice
CGT planning is complex and the rules change regularly. A qualified tax advisor or accountant specialising in property can help you develop strategies tailored to your specific situation and ensure compliance with current legislation.
Common CGT Mistakes to Avoid
Learn from others' mistakes to protect your investment returns:
- Selling one day early: Missing the 12-month CGT discount by poor timing
- Poor record keeping: Unable to claim legitimate deductions
- Ignoring inflation adjustments: Not using indexation where beneficial (pre-1999 assets)
- Mixing personal and investment use: Complicating PPOR claims
- Not getting valuations: Unable to prove improvement costs or market values
- Emotional decisions: Letting emotions override financial analysis
- Not planning for tax: Selling without funds to pay CGT bill
Important Tax Disclaimer
This article provides general information only and is not tax advice. Tax laws are complex and change frequently. Capital gains tax rules vary based on individual circumstances, property types, and ownership structures. Always consult with qualified tax professionals before making investment or exit strategy decisions.