Six-year capital gains tax rule


Would you like to know more about the six-year exemption rule on real estate capital gains tax? Amir Ishak, Senior Advisor and Client Director at Property Tax Specialists, explains what it is.




Capital gains tax (CGT) is the contribution you must pay to the ATO if you realize a capital gain on the sale of your investment property. Unfortunately, this is an inevitable part of the investment journey for most people who make a profit from the sale of their property.




However, the tax law allows for some exemptions and concessions, such as the exemption from the six-year absence rule for real estate capital gains tax, which could help real estate investors save thousands of dollars. . Here’s an overview of the CGT concession for the six-year absence rule, including what it is and how it works, as well as some tips on additional CGT exemptions that some real estate investors may be eligible for.
















What is the six-year rule for capital gains tax?




According to the Australian Taxation Office (ATO), if you sell a property that has been used to produce taxable income (such as rental income, for example) and you realize a capital gain on the sale, it is considered to be part of your annual income and will be declared in your income tax return (bearing in mind that the CGT is part of your income tax, not a separate tax).




However, the ATO allows taxpayers to claim certain capital gains tax breaks, depending on their circumstances.




For example, if your property is considered your primary residence, you generally won’t have to pay CGT on its eventual sale.




To prove to the ATO that a property is your place of principal residence (PPOR) or principal residence (MR) (these terms are interchangeable), you will generally need to do all of the following:




  • live on the property during colonization
  • put your things there
  • use the property’s address to receive your postal mail and as a domicile on the electoral rolls, and
  • have all utilities connected to your name




The six-year capital gains tax rule allows eligible real estate investors to treat their investment property as if it were their primary residence for a period of up to six years and continue to benefit from this exemption.




So, just as an owner-occupier could sell their PPOR without triggering capital gains tax liability, you, as a real estate investor, can potentially do the same, provided that:




  • you used the property as a primary residence before using it as an investment property to generate income, and
  • you do not name another property as the primary residence for the same period




How does the CGT six-year ownership rule work?




Once a property is considered your primary residence, you can move it and rent it out for up to six years after leaving without triggering CGT, as long as you don’t designate another house as your primary residence.




Many people end up using the six year rule in situations where they cannot live in their home for a period of time; for example, due to a move for work or obligations in another state. Instead of leaving it empty, they use the property to generate additional income for themselves and provide housing for others.




This means that an investor in this situation can generate income while still retaining the property as a primary residence for tax purposes.




Another benefit of claiming the principal residence exemption using the six-year rule is that it is reset each time the property is reinstated as a principal residence, which can happen if you move back within six years. This means that every time you return home the six year rule is reset. Thus, you can claim exemption from the RPAP, provided you meet the other criteria and do not move for more than six years in a row.




Here are some hypothetical examples to illustrate how the exemption might work in practice.




Example 1:




Louis currently owns a property in Sydney, which he bought three years ago. He has lived in the unit for as long as he has owned it and has declared, for tax purposes, that it is his RM.




Last month he was offered a temporary internship in Canberra, which he accepted. While there, the company paid for their accommodation in an Airbnb, so there was no need to treat another property as their primary residence.




In the meantime, he decided to rent the property so that the house does not sit empty and can generate income for him.




After six months, he was offered a permanent position in Canberra, which he accepted. He rented a property there for a year and a half, after which he decided it was time to sell his Sydney property and buy a house in Canberra.




Louis had only been away from his primary residence for two years, so the ATO allowed him to claim the primary residence concession due to the six-year rule.




Example 2:




Margo bought her first property in 2016, moved there immediately and declared it her primary residence with the ATO. Since she owns it, she has lived in the property, and it is the address used for her postal mail and her registration on the electoral roll. All utilities are also connected under his name.




Margo lives on the property alone, so during the 2020 pandemic, she decided to temporarily move to live with her sister, so she doesn’t need to be isolated on her own.




Because she was only moving temporarily, her home remained her main place of residence.




After a few weeks of living with her sister, Margo began to explore the possibility of renting out her property on a three month lease agreement so that she could generate additional income while being away from the property.




She eventually found tenants and rented the property from April 2020 to June 2020. After that, the restrictions began to ease and she was ready to return home.




Although she ultimately did not sell the property, she would still qualify for the principal residence exemption due to the six-year rule if she were to sell it.




CGT advice for real estate investors




There are a few additional capital gains exemptions homeowners can claim, so it’s worth knowing how you can take advantage of them. For example, even if you are unable to use the six-year rule, you may be able to receive or benefit from:




  • a 50% CGT discount if you have held your investment property for 12 months or more before selling it
  • partial exemption from CGT if your investment property served as a main residence for part of the ownership period before selling it; and
  • the six month rule, which allows you to keep two main residences (or PPOR) for six months in a situation where you buy your new home before selling the old one.




The ATO provides strict guidelines for legally minimizing your tax liability and claiming these exemptions. It may be helpful to hire a tax agent or property tax specialist to make sure you claim the tax breaks you may be entitled to.








Final thoughts




The most important CGT exemption offered to homeowners is the principal residence exemption.




The good news is that, like owner-occupiers, real estate investors can also claim the principal residence exemption using the six-year absence rule.




As long as you consider your property to be your primary residence and sell your property within six years of moving, you can apply the six-year rule and qualify for the principal residence exemption.




Unfortunately, as of July 2020, a foreign resident for tax purposes generally cannot claim the principal residence exemption.




To discuss any matters relating to capital gains tax, principal residence exemption or the six-year rule, you can consult a tax advisor.




Cover image source: Olga Kashubin / Shutterstock.com





About Amir Ishak

Amir Ishak is Senior Advisor and Client Manager at Property tax specialists. Amir is a Chartered Accountant (CA) with over 20 years of experience in business consulting, accounting and taxation. Amir has strong research, analytical and project management skills that help him meet the diverse financial needs of his clients. He has held senior advisory positions with the 4 major accounting firms and financial institutions. Amir is delighted to share his skills and knowledge with his clients at property tax specialists. You can follow it on LinkedIn.





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