'6 year rule' for main residence CGT exemption

Potentially having no capital gains when I sell my property. How does the tax man allow this? Did I hear it wrong?

The 6-year rule allows property owners to treat a property as their main residence for CGT purposes, even if they are not currently living in it, for up to six years. (Yes, this could be because you are travelling around Australia or overseas). This rule is designed to provide flexibility for people who need to move for work, family, or other reasons, and want to rent out their primary residence while maintaining the potential to sell it without paying CGT.

How does it work:

1. Primary Residence Exemption (PPR):

   • Under normal circumstances, the sale of your primary residence is exempt from CGT (Capital Gains Tax) in Australia.

   • However, if you move out of your home and rent it out, the property may no longer qualify for the PPR exemption unless you meet the 6-year rule.

2. Renting Out the Property:

   • If you move out of your home and decide to rent it out, the property is no longer considered your primary residence.

   • You can still claim the PPR exemption from CGT for up to 6 years while renting out the property.

   • During the 6-year period, you don’t have to pay CGT on the profit made when you eventually sell the property (as long as you meet the conditions).

3. Eligibility:

   • The property must have been your main residence immediately before you rented it out or left it vacant.

   • You must not have treated another property as your main residence during this period (exceptions apply if the second property is only treated as your main residence for a short overlap period).

   • You must sell the property within six years of first renting it out or leaving it vacant to claim the full exemption

   • If you move back into the property at any point during the 6 years, the 6-year clock resets, and the exemption can continue if you live there again as your primary residence.

   • If you sell the property after 6 years, you may be liable for capital gains tax on the profit made, based on the portion of time it was rented out (unless you can show it’s still your main residence or meet other criteria).

   • The rule applies to individuals and couples (not companies or trusts) who use the property as their main residence.

What happens if I rent out for more than six years?

If you sell the property after more than six years of renting it out, you may still be eligible for a partial exemption. The capital gain that you must report is apportioned based on the number of days the property was not your main residence compared to the total period you owned it.

Things to keep in mind:

Impact on Depreciation Claims

If you have claimed depreciation on the property’s building or fixtures while it was rented out to get a tax deduction, these amounts may need to be added back to the property’s cost base, potentially increasing the capital gain when you sell the property.

Good record keeping a must

Keeping detailed records of the dates you lived in the property, periods it was rented out, and any periods of vacancy is essential. Additionally, keep all receipts and documents related to the property’s purchase, improvement, and maintenance, as these can affect the cost base and ultimately the capital gain calculation.

Consider strategic planning

If you’re considering moving out of your home and renting it out, it’s wise to plan with the 6-year rule in mind. Consider how long you intend to rent out the property and whether you plan to sell it within the six-year period. This rule can significantly reduce (or eliminate) your CGT liability.

Consult a professional

Consulting with your accountant is highly recommended, given the complexities of CGT and the 6-year rule. They can provide personalised advice based on your specific circumstances and help you navigate the rules to maximise your tax benefits.

Consider these two scenarios:

You live in a property for five years, then rented it out for four years and then sell. Since the property was sold within six years of being rented out, the entire period qualifies for the main residence exemption, and no CGT is payable. (What!)

or

You rented out the property for eight years and then sold it, you would only get a partial exemption. The CGT would be calculated only for the two years beyond the six-year threshold. (Amazing isn't it?!)

Conclusion:

The 6-year property rule offers a valuable opportunity for property owners to manage their tax liabilities effectively when circumstances change. By understanding and correctly applying this rule, you can potentially save a significant amount in capital gains tax, making it a crucial consideration for any property investment strategy. Each situation can be unique, so it’s advisable to speak with a tax professional to fully understand how the 6-year rule applies to your situation, especially if you're considering renting out your property and later selling it.

More information

Treating former home as main residence | Australian Taxation Office

Your main residence - home | Australian Taxation Office

To discuss any of the above further, you can ring our office on 4021 2801.

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