Q: I bought a unit in February 2013 but did not move into it for two years. I rented the unit out while I continued to rent elsewhere. In 2015, I moved into the unit and have been living here ever since.
Does the six-year rule work in reverse? Can I consider the property my main residence for tax purposes from when I first bought it or only from when I moved in? To what extent would capital gains tax apply if I sold today? I now intend to move out again and rent elsewhere for a change.
Can the six-year rule apply after I move out if I maintain it as my only nominated main residence for tax purposes? To add to the complexity, while I have lived here I have rented out a room. How does that add to or detract from applying the six-year rule?
A: A property that is regarded as a principal place of residence (PPOR) is exempt from capital gains tax (CGT). If the property is sold within six years of the first time it was rented out, it remains exempt from CGT under the six-year exemption rule. In addition, you cannot have another PPOR at the same time.
However, the six-year rule for CGT exemption only applies to PPORs that are rented out after the owner vacates the house. In your case, the unit was never your PPOR – and the ATO has a number of tests to determine this.
These include whether you’re living in the property, whether your personal belongings are stored there, whether your mail is delivered there, and whether you are on the electoral roll there. You did not occupy the property initially, so the unit was not your PPOR when you purchased it.
If you sold the property now, there would be an apportionment of the capital gain made – this would be calculated using time as a rental property divided by the total time of ownership. This determines the taxable portion of the gain made. The calculation should be done using the actual number of days based on contract date and not settlement date.
The gain would be discounted by 50% as you have owned the property for more than 12 months. After you moved back in, the property could then be considered your PPOR for CGT purposes.
As this means you now satisfy the ATO test, the six-year exemption rule will be available to you to cover the period during which the property is rented after you leave it. You say you will be moving out to rent somewhere else.
Note that your situation will need to be reviewed if you buy another property to live in, because you can only have one PPOR at a time (subject to minor exemptions). The issue of renting a room out does affect the tax situation.
You will need to determine what proportion of the property is actually rented – that proportion will be subject to tax, even though the rest of the property will be exempt, as you are living in it. This will reduce the exempt part of the profit in the calculation. However, this issue does not affect the application of the six-year rule to the part of the house that you are living in.
"You will need to determine what proportion of the property is actually rented – that proportion will be subject to tax"
Need to know
- The six-year rule applies to a PPOR, provided you occupy the property first.
- You cannot have two PPORs at the same time (with minor exemptions).
- Renting out part of your home affects your tax obligations.
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