Most of us know that if you sell the property you’re living in, you don’t pay any Capital Gains Tax (CGT) if the value has increased since it was purchased.  If you purchased your home prior to 1985, you’ll never have to pay Capital Gains Tax on it, regardless of whether it’s your own home or a property that you’ve been renting out (this is because Capital Gains Tax laws were only introduced in 1985 and were not retrospective).  But with more and more houses changing hands (and the fact that it’s now 25 years since the introduction of CGT), it’s more likely that if you own an investment property, you’re liable for Capital Gains Tax.  But did you know that if you want to rent out a property that was previously your own home that you can avoid paying Captial Gains Tax?

Rent out your home without paying Capital Gains Tax – the lesser known Tax Act ruling

A lesser known part of the Tax Act provides CGT relief on real estate, even if you’ve been renting it out as an investment property.  The Australian Tax Office implemented a rule that, initially, was intended to be used by those people that found themselves living away from their primary place of residence (typically people working overseas).  The ATO ruled that it would not be reasonable for someone to have their own home, have to move out to work elsewhere for a period of time, and then come back to live in it only to pay Capital Gains Tax on the increase in value while they were away.

The tax rules now state that you have a period of 6 years to be away from your property, and renting it out, before you have to start paying Capital Gains Tax.  Whilst this sounds like a great idea, there are a few restrictions to that you need to carefully consider:

  • the property must have been your primary place of residence
  • there is no minimum amount of time that you had to live at that property, however it must have been a bona fide home
  • you can stay away from your primary place of residence and rent out that property for a maximum period of 6 years
  • you cannot claim a CGT exemption on another property over that period of time

There has been some debate about whether you need to move back into the property prior to selling it such that you’re living in it again at the time of the sale, however this is not the case.  The ATO will recognise the fact that the property used to be your home and will treat it accordingly.

What happens if you move back into the property before the end of 6 years?

From a tax point of view, it’s as if nothing happened.  In addition, you can move out for another 6 years and the time limit resets.  There is currently no limit on how often you can do this.

What happens if you keep the property rented for longer than 6 years after you’ve moved out?

Where you continue to rent the property for longer than the 6 year time limit, the ATO will still recognise it as your primary place of residence for the initial 6 years but you will have to pay tax on the subsequent years.

Contact our expert financial planners for more tax saving tips or call us on 02 8238 0888 to book your free first financial planning meeting.

Share

4 Responses to “Rent your property and still not pay Capital Gains – it is possible”

  1. Graeme November 22, 2012 at 5:33 pm #

    Hi, I currently rent in Sydney and have bought a property on the mid NSW coast near Port Macquarie as my first home and intend to live there as my primary residence through to retirement.

    In order to work out how best to set things up as a new lifestyle I first need to rent the property out for 1 to 2 years while we establish work in the region. You mention there is no minimum time to live in the property in order to claim it as my primary residence. Would 2 months be sufficient? or even 1 month?

    Please advise as it is obviously beneficial to have the house designated as my home if it means living there for 2 months first.

    Regards

  2. Louise Hockey February 12, 2013 at 1:23 pm #

    I lived in my marital house for 13 years then seperated from husband and moved out 10mths later he passed away how long can i rent marital house out before selling so i dont have to pay capital gains tax

  3. Nathan Gough March 5, 2013 at 1:33 pm #

    I’m looking at moving myself and family back into my unit whilst im away with work, which has been an investment property for the last 3 years, your web site says you need to live in your property for a reasonable amount of time in your property to restart the 6 year capital gain rule, but what is classed as reasonable amount of time.

  4. Steve May 22, 2013 at 11:52 pm #

    Hi, is it possible to get this 6 year repeating exemption cycles if one owns another investment property at the same time as the primary residence, whilst still living at a third location. The article does not mention whether this detail of having an extra investment property affects the ruling. Thanks