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Q: I bought a house in September 2001 and lived in it as my main residence until February 2012, when I moved interstate and rented it out. I haven’t nominated any other place as my main residence since then, as I’ve been renting interstate. It is fast approaching six years now since I moved out, and I’m wondering what I need to do to avoid any CGT on sale? Does the place actually need to be sold within six years of first being available for rent, or am I just not allowed to rent it out beyond that time?
I read that I can move back into the property to reset the six years – not really a preferred option, but I would if needed. Is there a minimum time that I would need to live there again to make the reset happen?
A: Assuming no other property was nominated as your main residence between September 2001 and February 2012, you may continue nominating your Queensland property as your main residence for capital gains tax (CGT) purposes after February 2012.
The ATO generally allows a property to be treated as your main residence for up to six years if used to produce income. Thus, you were right in saying that if the property stops being rented out before the six-year period expires, any capital gains will be tax-free.
"A range of factors will be examined to decide if the intention and action of moving back into a home is genuine"
Moving back into the property will ‘reset’ another six years for CGT exemption purposes (subject to antitax avoidance rules). There is no statutory minimum time in the current tax legislation, but a range of factors will be examined to decide if the intention and action of moving back into a home is genuine, such as the actual length of time you stay in the property, and whether you and your family all move back in with your personal belongings during that time; your mailing addresses are changed and your address on the electoral roll is updated; and utilities and services such as gas and
power are connected.
If the property has been producing income for over six years, either accumulatively or continuously, the capital gains will be proportioned for CGT purposes, based on the number of years in excess of six years that the property was rented as a percentage of the total number of years the property was rented.
For example, if the property has been owned for 20 years and was the main residence for the first 11 years and rented out for the remaining nine years, then three years (being the years exceeding the six-year period) out of the nine incoming-producing years will be subject to CGT, or 33%. A 50% discount will also be allowed, based on today’s law.
Note that in real calculations the ATO counts the number of days instead of years. As for determining the property’s cost base in order to calculate the gain, for CGT purposes it would be the market value in February 2012 in your case, when the home was first used to produce an income, with potentially some balancing adjustment for depreciation where applicable. Unfortunately, the property’s market valuation at the end of the sixth year is irrelevant.
Need to know
- The main residence exemption applies for up to six years.
-The six-year rule is reset for every period of absence.
- CGT is pro rated if the property is rented for over six years.
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