Tax Q&A: Which property is more eligible for CGT?

By John Hehir | 23 Apr 2020

Q: I have a question on capital tax gains. I’ve read a lot about the six-year rule, but am not sure how to apply it.

I purchased a block of land in 2010 in Western Victoria, where I built a house in 2011. I lived in the house until 2016, when I was relocated to Eastern Victoria for work. Since then, I have been renting out the house.

When I moved to Eastern Victoria in 2016, I purchased another house, but I always had the intention of moving back west at some point in time. However, my plan has now changed due to job security, and I intend to sell the western Victoria house. If I do, does the six-year rule still apply?

Thanks, Matthew

A: According to Section 118-145 of the Income Tax Assessment Act 1997, a property can be treated as your main residence for up to six years after you move out – this forms the basis of the six-year rule that exempts you from paying capital gains tax.

The rule can apply to you based on the situation that you have described. However, you can only nominate one property at a time as your main residence to claim this exemption. To ensure that you’re reaping the most benefit from the rule, you should obtain some professional advice to calculate the benefit of the exemption in comparison to the possible capital gains tax to be paid when you eventually sell your Eastern Victoria property.

What does that mean? You are entitled to claim the main residence capital gains tax exemption for only one property at a time regardless of whether or not you have been living in it for up to six years. You would normally choose to claim exemption on the property that grew the most during that period, so this means that if your property in Western Victoria grew more than the Eastern Victoria property when you were living in it, then claim the main residence capital gains tax exemption on your Western Victoria property and don’t include any capital gain in your tax return when you eventually sell it.

You would normally choose to claim the capital gains tax exemption on the property that grew the most during that period

Additionally, I would encourage you to obtain valuation reports from at least two real estate agents each time you move properties so you are aware of how much each property has grown over time, and, in turn, which property will prove to have the most value when the time comes to compute the exemption. This will put you in the best-informed position to know which property you should be claiming the exemption for.

A good example of benefiting from not claiming the main residence capital gains tax exemption on your Western Victorian property would be if it didn’t grow in value from the time that you rented out until you sold it, and you had evidence of this from valuation reports done at the time you moved out. This way you wouldn’t need to claim the exemption for your Western Victorian property, and you could be claiming it on your Eastern Victorian property, which may have grown during this time.

Need to know

  • If you own two properties, you can choose to apply exemption to the more profitable property.
  • Get a professional valuation so you can make an informed decision on how much your property has grown in value.
  • The growth history of your properties will help you determine which one to use for the main residence exemption.

John HehirJohn Hehir
is CEO of Financial Advisers Australia
and a licensed tax adviser at the Tax Practitioners Board

 

 

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