If you’re new to the property investment sphere, being aware of the main residence exemption 6 year rule could save you thousands of dollars on the eventual sale of your investment property.
Yet, so many first-time investors remain uninformed of the benefits of the 6-year rule.
For example, some investors rent out their property immediately after purchasing it or don’t treat it as their PPOR – all factors that trigger capital gains tax.
To help you gain access to these benefits, we’ve compiled this ultimate guide to the main residence exemption 6-year rule.
What is Capital Gains Tax (CGT)?
Any profit on the sale of your investment property is considered a capital gain and needs to be declared on your annual income tax return. This is called capital gains tax or CGT.
Thankfully, the Australian Tax Office (ATO) offers several ways in which you can avoid paying capital gains tax. These exemptions include:
- The principal place of residence (PPOR) exemption
- The main residence exemption 6 year rule – which we will be discussing in this article
- The 50% CGT discount if you’ve held your property for 12 months or more before the CGT event, i.e. selling the property
- The six-month rule – this when the ATO allows you to hold two PPOR if a new home is acquired before a purchaser disposes of the old one. Both properties will be treated as PPOR for up to six months in this case.
For more information on how to calculate CGT, check out these three simple methods here.
What Is a Principal Place of Residence (PPOR)?
Before delving into the main residence exemption 6 year rule, you should have an understanding of what constitutes as a principal place of residence.
As a general rule, the ATO exempts you from paying capital gains tax on the sale of your family home, otherwise known as your principal place of residence.
This is because you don’t generate an income from living in your home.
For your property to be considered a PPOR, you have to meet a few eligibility criteria:
- living in your family home for the full duration that you have owned it;
- keeping your possessions there;
- using the address to receive your postal mail; and
- having all the connected utilities are in your name.
For property investors who do not necessarily plan on living in their investment property, it is useful to know about the CGT 6-year rule before immediately renting it out because you could qualify for an exemption.
What Is the Main Residence Exemption 6 Year Rule?
The main residence exemption 6 year rule allows you to treat your property investment, as if it was your principal place of residence, for a period of up to six years, whilst you rent it out.
In other words, just as property owners can sell their family home without having to pay CGT, you would be able to sell your investment property, within the six years, and be exempt from paying CGT.
To qualify for the main residence exemption 6 year rule:
- your investment property must be considered as your PPOR before renting it out; and
- you won’t be able to use another property as your PPOR for the same period.
How Can You Take Advantage of It?
After the initial six month period, you can move out of the property and rent it out for up to six years.
For example, suppose you are unable to reside in your home for some time due to work obligations out of state. In that case, you could opt to rent out your home to earn some extra money — all without prompting the need to pay capital gains tax upon the property’s eventual sale.
In 2014, Laura purchased her first property in Brisbane. It has been her main residence for the entire period that she has owned it, which totalled to four years.
In 2018, however, she was offered a new position at her company’s office in Sydney. The employment contract was valid for two years. She accepted the placement and moved to Sydney shortly after.
Her friend was looking for a roommate at the time, and Laura wasn’t ready to commit to purchasing a new home yet, so she decided to rent and move in with that friend. As a result, she didn’t treat any other house as her main residence.
She opted to keep her home in Brisbane and rent it out to earn some extra money.
Two years later, in 2020, she was offered a more permanent position at the Sydney office, which she accepted. As a result, she decided to sell her Brisbane home and permanently relocate. Through the application of the capital gains tax property 6-year rule, she was able to sell the property and claim the CGT exemption.
Consequently, she was not required to pay capital gains tax.
You may also choose not to rent it out and instead treat it as a holiday home.In either circumstance, you will be able to claim a capital gains tax exemption.
Another factor to note about the main residence exemption 6-year is that it resets each period that you don’t live in your PPOR and rent it out. Each time you move back home, the capital gains tax 6-rule restarts, provided that the time you are away doesn’t surpass the 6 years.
How Does the Main Residence Exemption 6 Year Rule Apply To Foreign Residents?
In 2017, the Australian Government announced the removal of the main residence exemption 6-year for foreign residents.
From 1 July 2020, even if you satisfy the requirements for the 6-year rule, if you are a foreign resident and you sell your main residence, you will not be eligible to claim the main residence CGT exemption.
If you are a foreign resident and want to avoid paying CGT, you may want to consider delaying the intended sale of your main residence until you have obtained Australian residency for tax purposes.
Alternatively, if you’re considering moving overseas and becoming a foreign residence, you should consider selling the property before your departure.
If you are looking to reduce the amount of capital gains tax on the sale of your property investment, you may want to consider how the main residence exemption 6 year rule works,].
To qualify for the main residence exemption, you’ll need to:
- hold the property in your name and not in a company or trust’s name; and
- ensure that your property remains your PPOR.
As long as you sell your property within six years of renting out, you can apply the CGT 6-year rule and qualify for the main residence exemption.
If you are unsure whether you qualify for the main residence exemption 6 year rule or you simply would like someone to provide you with tailored advice for your situation, you can consult with a qualified tax agent or accountant. Should your circumstances not allow for a full CGT exemption, there are other ways in which we can help you significantly reduce your capital gains tax.
To find out how Box Advisory Services can help you, feel free to book a free consultation with us.
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Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek a second professional opinion for any legal or tax issues raised in your business affairs.