Most property owners know that the sale of their main residence is free from capital gains tax (CGT). Normally, rental properties are liable for CGT, except in a few special cases. In this post, I discuss a useful exemption.
You can choose which of your properties is covered by the main residence CGT exemption, allowing you to potentially save thousands of dollars in CGT.
Some Finer Details
Here is an overview of some of the important finer details:
- The property must be a dwelling used wholly or mainly for residential accommodation.
- You must have lived in the property previously.
- Only one property can be covered by the exemption at a time, except for a brief period while you move between dwellings.
- You must make the choice in the income year that the first sale occurs.
- Other CGT concessions and discounts are applied after this exemption, e.g. the small business concessions and the 12-month 50% discount.
- The exemption does not have to cover the whole period until the sale occurs, i.e. you can choose to end it some time before the sale.
- The time limit for the exemption is unlimited, if the property does not earn income.
- The property can earn income for a total of six years and still be covered by the exemption (see below).
There is a rule that comes into effect if the property earns income for more than six years. The rule is called the ‘home first used to produce income’ rule.
If you rent out a property for more than six years, you will have to pay CGT on the gain. To calculate the cost of the property for CGT purposes, you must use the market value of the property at the time it first earned income. This could mean that you pay CGT on over six years of gains.
To avoid this trap, you must take one of the following actions before the property has earned income for six years: sell the property, or leave it vacant until sale.
For more information, see Treating a dwelling as your main residence after you move out on the ATO website.
As with anything tax, ask your tax accountant about your specific situation.