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Exit planning: CGT and the timing of disposal

Most property investor planning focuses on the buy side. The sell side - when, how, and in what order to dispose of properties - is where the final tax liability is decided. Thoughtful exit planning can save 20-30% of your final tax bill.

The CGT framework at disposal

When you sell an investment property:

  1. Calculate capital proceeds: sale price minus costs of disposal (agent fees, legal fees, advertising)
  2. Calculate cost base: purchase price plus acquisition costs (stamp duty, legal) plus capital improvements
  3. Capital gain: proceeds minus cost base
  4. Apply 50% CGT discount: if held 12+ months, divide the gain by 2
  5. Add the discounted gain to your taxable income: pay at your marginal rate

Example: sold for $1.1m, purchased for $600k, total costs $60k, capital gain $440k. After 50% discount: $220k added to taxable income. At 37% marginal rate: $81,400 CGT liability.

Timing principle 1: choose a low-income year

If you can control the disposal year, sell in a year when your other income is low. Common scenarios:

  • You’re between jobs or taking a sabbatical
  • You’re in retirement transition with reduced salary
  • You have a significant one-off expense that reduces net taxable income
  • Your business has had a loss year

On a $220k discounted gain, the difference between a 45% marginal rate year and a 19% marginal rate year is $57,200. Timing matters more than almost any other optimisation.

Timing principle 2: split the gain across years

Some disposals can be structured across two tax years. For example:

  • Sign contract June 25, settlement August 10
  • Signing the contract in June means the contract date is the CGT event date, which is in the previous tax year

Or alternatively:

  • Option + final settlement structure, where the first payment (option fee) triggers CGT in one year, final settlement in the next

These strategies require pre-planning with an accountant and specific contract structures.

Sequencing: sell losses first

If you have multiple properties, one with a gain and one with a loss, consider selling both in the same tax year. Capital losses offset capital gains. If you only sell the loss-making property, the loss carries forward but doesn’t help until you realise a gain.

Portfolio rebalancing around year-end is common for this reason.

The main residence sequence

If you have multiple properties and one is your main residence, your sell sequence should typically be:

  1. Sell properties with the smallest gain first (minimise CGT exposure)
  2. Or sell the property that has had the longest holding period (full 50% discount)
  3. Consider moving back into an old main residence for 3-6 months before selling to reactivate partial CGT exemption (complex, but legitimate under specific circumstances)

The depreciation trap

Depreciation claims reduce your cost base. If you’ve been claiming $8k/year of depreciation for 8 years, your cost base has been reduced by $64k. That $64k becomes part of the capital gain on sale.

This isn’t an additional tax - it’s deferred tax. But many investors are surprised when their actual cost base for CGT is much lower than the price they paid.

The 6-year rule on main residence

If you’re selling a property that was once your main residence and has been rented out, the 6-year rule may still apply to make part or all of the gain CGT-exempt. This is worth tens of thousands and is often missed.

Check: when did you move out, when are you selling, did you claim another property as main residence during the gap, did you move back in at any point?

Structural exits

For large portfolios, consider:

  • Distribution from trust: capital gains in a trust can flow to beneficiaries with different marginal rates
  • Pre-retirement sell-down: selling investment properties in the year you retire or transition, when marginal rates are lower
  • SMSF to pension phase: for SMSF-held properties, disposing in pension phase eliminates CGT entirely

These structural moves require years of preparation, not last-minute implementation.

The “never sell” thesis

Some investors never realise CGT because they never sell. They use equity release and refinancing to extract liquidity without triggering a sale. At death, properties pass to beneficiaries with a stepped-up cost base in certain circumstances, potentially eliminating the accumulated CGT liability.

This “never sell” strategy works best for:

  • Investors with multi-generational wealth plans
  • Properties with strong long-term rental income (positive cash flow)
  • Estate plans with charity or superannuation recipient considerations

It is not a free lunch. Holding costs persist; properties require management; portfolio diversification suffers. But for a subset of investors, exit planning means planning to never exit.

The pragmatic exit checklist

Before disposing:

  1. Model the CGT at current marginal rates
  2. Consider timing (same year vs deferred year; high-income year vs low-income year)
  3. Check the 6-year rule eligibility
  4. Identify any main residence exemption opportunities
  5. Consider offset with loss-making properties or capital losses carried forward
  6. Calculate depreciation recapture impact
  7. Discuss with a property-tax specialist
  8. Plan settlement timing across the financial year cutoff

An extra week of planning can save tens of thousands. Exit planning starts 2-3 years before the actual sale.