Q: We have a rental property in Padstow, NSW, and it has been rented out for five years. Next year will be our sixth rental year, but we can’t move back into our property until two years from now (the seventh year of ownership) due to family-related issues. If we leave the property vacant (not rented out) and do not report negative gearing in our tax return for the sixth year:
• Are we entitled to CGT exemption if we sell two years down the track?
• Do we need to physically move back in (occupy our property) after the sixth year to be entitled to CGT exemption?
• If we rent it out in the seventh year, is the property reset back to year one? What are the CGT impacts?
Many thanks, Therese
A: You can’t make the exemption choice for a period before a house first becomes your main residence. Therefore I have assumed you lived in the Padstow property as your main residence prior to renting it out and that you are currently not treating any other property as your main residence.
Applying the exemption to your scenario, the maximum period the house can continue to be your main residence while it is used to produce income is six years. However, while the house is vacant, the period is unlimited, which means that if you cease renting before the six-year period and leave it vacant before sale, the exemption applies for the whole period and no CGT will arise.
"There is no requirement that you move back into the property prior to selling in order to claim the original exemption"
In the alternative scenario that you have proposed, in order for the six-year period to restart, you would need to physically move back into the property and make it your main residence again.
In that instance, if you were to later move out and commence renting out the property again, you could rent it out for a further six years and the exemption would apply. The ATO does not specify a minimum length of time you are required to live in the dwelling to re-establish the property as your main residence in order to reset the six-year absence rule.
Determining if a dwelling is your main residence is always going to be based on the facts and individual circumstances of each case. Should you continue to rent out the property beyond the six-year period, the capital gain will no longer be fully exempt.
However, there is no requirement that you move back into the property prior to selling in order to claim the original exemption. You will be deemed to have acquired the property at the time and market value when you first used it for rental purposes. This means that when you sell the property then be partially reduced by the six-year main residence exemption.
In your case, if you rented out the property for seven years straight and then sold the property, only one seventh of the gain would be taxable, as it would be deemed a seven-year ownership period, with six of those years being exempt.
Additionally, it is important to note that the main residence exemption will not be available for nonresidents from 1 July 2019, with no grandfathering for use to that date.
Need to know
- A CGT exemption can apply indefinitely if your former PPOR is left vacant.
- A property doesn’t need to be re-occupied to claim exemption.
- CGT is calculated using the property’s value when first used to produce income.
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