How to avoid capital gains tax while renting out your house

By
Michael Quinn explains little known ways to avoid CGT when turning your home into a rental.

One downfall to renting out an investment property is the capital gains tax (CGT) that will be payable upon the sale of the property. CGT is the tax charged on capital gains that are procured from an asset. You are liable to pay this tax when your capital gains exceed your capital losses in an income year.

However, there are legal ways to avoid paying CGT while renting out your house. Capital gains tax exemptions are allowed by the Australian Taxation Office (ATO) under certain scenarios.

Need help finding the right property manager? Click here for free personalised help from one of our experts.

People’s lives are constantly changing. Whether it’s due to a change of future plans or circumstances, there are many reasons why you may decide to lease out your main place of residence. In order to do this without incurring CGT, be sure to understand the ATO’s rulings with regards to this topic.

The following simple rules apply:

  • Only your main place of dwelling will be exempt from CGT. Thus you can’t own two properties, live in one for a couple of years and then alternate between that property and your main residence while avoiding paying CGT on both houses.
  • Usually, if you purchased a house after 7.30pm on 20 August 1996 you have to have lived in it when it was first bought (ie, not rented it out) to be entitled to a full exemption. This is because by renting the property straight away, the ATO deems you to have acquired the property purely as an investment to produce income.
  • Provided the above terms are met, you are exempt from CGT if you rent out your home for less than six years.
  • If you’ve held a property for more than 12 months and the ATO has deemed you subject to CGT, you are entitled to a 50% discount.

Capital gains tax is dependant on individual circumstances and as such claims can become quite complex. This is especially true where you own multiple properties and increase the frequency with which you move from one property to another.

Exceptions to the rule 

Below is a summary of the criteria for full and partial exemptions:

Full exemptions

To qualify for a full CGT exemption, the property must have been your main residence from when you acquired it. If you move out of the property and rent it out, you can continue to claim an exemption from CGT for up to six years after you move out. If you do not rent it out, you can claim a CGT exemption for the property for an indefinite period after you move out.

Moving from your main residence could be for reasons such as:

  • Accepting a new job interstate or overseas
  • Staying with a sick relative long term
  • Going on an extended holiday

A taxpayer can still apply the six year exemption rule if they acquire and reside in another property. However, there is no ‘Main Residence’ exemption applied to the second property which subsequently becomes subject to capital gains tax.

Partial exemptions

In situations where multiple investment properties are acquired over the period, the ATO sees the six years as cumulative. This denotes that you only get six rental years in total before you are liable to pay CGT. Fortunately, the CGT will be exacted proportionately, for instance if you made a $200,000 capital gain on a property that you rented out for eight years, you will only have to pay CGT for the two-year period that exceeds the six-year exemption.

Thus, the CGT will be exacted on $50,000, then take into account the 50% discount for holding a property for over 12 months and this gets dropped down to $25,000. You will be able to verify whether or not this exemption applies to you via the ATO website, or through a CGT knowledgeable accountant.

Partial main residential exemption after 1996

If you originally bought the house with the intent to rent it out after 20 August 1996, but later changed your mind and chose to live there, you will become partially exempt from CGT on a proportionate basis of ‘years lived in’ to ‘years rented’.

When there is a change of status from income producing to main residence or vice versa, you should obtain a valuation as of that date. A real estate agent’s valuation should suffice; however, a valuation from a licensed valuer is recommended.

Below are some general yet useful guidelines:

  • Although there are provisions for farmers, properties larger than two hectares are not exempt from CGT.
  • The residences of private companies and trusts (etc) do not qualify for a CGT exemption.

Capital gains tax can be a very intricate topic. Therefore, advice must be sought for individual circumstances. For more information and guidance contact The Quinn Group on 1300 QUINNS (784 667) or visit www.quinns.com.au and submit an online enquiry.

 

Need help finding the right property manager? Click here for free personalised help from one of our experts.

Top Suburbs : werribee , north lambton , newcastle , tuart hill , darlington

Submit a comment

go back
Comments (23) Add your comment

23 Responses to "How to avoid capital gains tax while renting out your house"

  • Gary says on 05/08/2013

    I bought a investment property in may 2002 and have rented it out for the last 7 years, can I get an CGT exemption if i move into my rental property after I sell my main residence, and how long do I need to live in my renatl property before I pay no CGT

  • Ross says on 14/08/2013

    Say I buy a house in Victoria as a primary residence in which I reside for $1,000,000, then 10 years down the track I sell it for $2,000,000. After 18 months from date of purchase I acquire a tenant for 7 months (to help me pay the bills) who occupies 45% of floor space.

    Will I be exempt from CGT after the sale? Or would I be up for CGT during that financial year and roughly how much?

  • Serious Sam says on 22/08/2013

    If I buy a house in Victoria for $37, live in it every third Sunday and then sell it to my dog for 17 cents, will I still be able to visit him during lent?

  • marianne says on 27/08/2013

    Thank you this has been very helpful.
    So we lived in our home from 1988--1990 we have since rented it out till now and we are now looking at selling. 1. should we move back in for 6-12 mts. Would this help with CGT?
    2.Can we take the first 6 yrs off so then rented it on paper from 1994 to 2013 for CGT.
    3.I take it then we would have to pay CGT the second house that we lived in . Do I have this right????
    THanks

  • Pete says on 28/08/2013

    Hi,

    So I have just bought a property for less than market value and will make a significant gain. I'm residing at the property because I got the first homebuyers so I have to stay there for at least 6 months to qualify for the grant. Is there a time frame that you have reside at the property before you can sell it to get the exemption on capital gains or can you just sell it straight away? Also is there a certain amount of exemptions you can have in a certain timeframe or can I buy my next property straight away for under market value move in and sell it straight away and still be exempt from th CGT?

  • Al says on 12/10/2013

    Have bought my property in 2008, lived in it for 6 months....my understanding is therefore it has been exempt from CGT for 6 years. If I move back for 6 months will it be exempt for another 6 years? Just not sure if u really want this place to be my main residence for now though I could change my mind

  • Janine says on 29/10/2013

    What happens when you buy a property with two tiltes eg
    We are looking at buying a house to live in with another old house on it .There are two tiles but they are connecteted together

  • mj says on 10/12/2013

    hi

    we built a house 1.5 years ago in victoria, lived in it for just over 6 months and we had to move to Dariwn for my husband 's job. we have been renting our house in victoria for a year now, and we are also renting a house in Darwin for us to live in. We are thinking about selling our property in Victoria, will we be paying CGT ?

  • Jamie says on 13/01/2014

    Hi
    I purchase my place of residence in 2002 for $220000. I am in the process of building 3 units build cost $600000. I am considering moving back into one unit but if capital gains can be avoided when selling?

    If I sell all 3 units without moving into one unit. How long should hold onto the units before selling to avoid or reduce capital gains tax on the units. If unable to be avoided cgt what would the amount of capital gains tax ?

  • Maria says on 25/02/2014

    We bought a small house & rented it for about 4 years. Now we have have built a new home on the block
    if we sell it before we move into it will we need to pay CGT.

  • Lisa says on 25/03/2014

    We bought a property with $225 000 and rented it out first about for 7 months. Then we moved in to it and lived there for 9 years. We bought another property and moved there and rented out old house for 16 months before we sold it. Do we need to pay CGT for the old house.

  • Deb says on 27/03/2014

    I purchased a home in Sydney and rented it out immediately, then moved into it as main residence after spending 2 years overseas. Upon moving in, the property was valued lower than the original purchase price. My accountant maintains that I still have to pay cgt when I sell in the future based on the selling price and the number of years tenanted. Can you please clarify how the valuation of the property upon moving in can impact my case. Many Thanks

  • Amigo says on 28/03/2014

    Hi , i paid CGT when i sold my investment property.. but soon after that, i.e. within 2 years i bought a house to live in. Can i claim my CGT back?
    thanks in advance.

  • Mary says on 20/04/2014

    Hi my son and I both own a duplex next to each other can I move in to his and he into mine and rent each others, as mine is bigger and more suitable for his family, will this also reduce our tax?
    Thanks for your assistance
    Mary

  • Mary says on 20/04/2014

    Hi my son and I both own a duplex next to each other can I move in to his and he into mine and rent each others, as mine is bigger and more suitable for his family, will this also reduce our tax?
    Thanks for your assistance
    Mary

  • Neil says on 16/05/2014

    I left Australia on the 15 June 2008 to take up employment and resident overseas. I then rent my main residence sometime on 8 October 2008 until late December 2013. Since then I have kept it vacant. I am now planning to sell the house in order to avoid paying CGT. Until what date do I have in order to avoid CGT. Is it until 15 Jun-14 or October 2014 (i.e 6 yrs from the date I left Australia or 6 yrs from the date I first rented out the property.)
    Thanks

  • Rachel says on 20/05/2014

    I bought my home in Florida in 2001 and lived in it until 2008. I then rented it from 2010 until 2014. I now want to sell it. Can you tell me what will my Capitol gains be...I am Canadian. Also, my realtor told me that if I sell my home to a buyer who will use the home fro primary residence then I don't have to pay capitol gains....is that correct?

  • Robyn says on 25/05/2014

    I brought a house four years ago. My daughter lived in it for 1 year (paid no rent) then I moved in for 1 year (whilst I was building as new house). I now have it rented out. When can I sell to avoid CGT.

  • Paul Gazzard says on 02/06/2014


    We settle on our NEW home purchase 6 weeks before we settle on our existing family home.

    If I change our postal address within that 6 weeks to the NEW home address, does that mean that this then becomes our primary residence & our existing family home is then subject to Capital Gains?

    Should I keep our existing family home as our postal address until the day of settlement?

  • chris matthews says on 04/06/2014

    Hi Michael - from my understanding, you DO NOT get a valuation when you change from income producing to home or vise versa. it is done wholly on % of time income producing. can you explain the reasoning behind the valuation method as I must admit I have never heard of this

  • Ben says on 29/06/2014

    I have purchased our first property with my sister 60% my way and 40% her way that we are living in and have been for nearly 4 years.
    If we now rent the property out
    How long do I need to move back in to avoid captital gains tax?
    If my sister buys another residents by herself that she will live in and continues to live in after taking first house off renting market do I or both us now have to pay capital gains tax on my property?
    Thanks in advance

  • dallas says on 06/07/2014

    I have purchased a new unit i would like to live in - I want to know if I should sell my home and put the equity into the new unit or hold onto the house which also has a granny flat attached

  • Dale says on 28/07/2014

    Hi, we're currently building two townhouses on a lot where we knocked our PPOR down. We currently renting whilst we develop. We plan to move into one short term whilst we do some finishing touches to the one we plan to live in permanently. Once we finish these few things we will move in and put the other on the market. Are we able to reduce CGT by doing this? Thanks and cheers

Get help financing your investment

Simply complete the form below, and let one of our experienced advisors assist you. Our advisors will help you work out whether you can afford an investment property, and assist you in selecting the best loan for your needs.

Can you afford that property? Find out now
How soon would you like a mortgage?
What is your Annual Household Income i $
Do you currently own any Investment Properties?
Do you own your own residence?
How much equity do you have in all your current properties?
First Name
Last Name
Where do you live?
What number can we reach you on?
E-mail address
We value your privacy and treat all your information seriously - you can check out our privacy policy here
Add your comment