Property Oct 27, 2021

What is the Capital Gains Tax exemption and how does it work?

5 min read

r-architecture-JvQ0Q5IkeMM-unsplash
r-architecture-JvQ0Q5IkeMM-unsplash

Following on from our last article, there are special circumstances in which you don’t have to pay Capital Gains Tax when you sell an investment property. This is called a Capital Gains Tax exemption. Read on!

When am I exempt from paying Capital Gains Tax on an investment property?

If you have been living in the property and it was your main residence, but you have since moved out there are special circumstances which allow you to claim a CGT exemption, even though you no longer live there.

You may have chosen to rent the property out after you moved out or you may have chosen to leave the property vacant. In these situations you may be exempt from paying CGT when you sell for up to six years after you move out.

This is often called the Six Year Rule. For a full detailed outline, go to the ATO website here.

The Six Year Rule

A former home used to generate income can continue to be treated as your main residence for tax purposes for up to six years. You can choose to move back in at any time and “reset” the six-year clock, as each period of absence from the property allows another six year window to claim the exemption.

Here’s a real-life example with one of the Entourage team:

Chris and Chantelle own a house which they bought and lived in from 2012-2019. Whilst living in it, they didn’t use it to produce income. They decided to pack up their family in 2019 and travel for an extended period. They rented the house out while they travelled, but upon their return, decided to live in a different suburb and chose to rent instead. They continued renting out the house they owned to their tenants.

They plan to sell the property in 2022, though currently still treat the property as their main residence, as they do not currently own any other property. Based on advice they have received from their accountant; this will exempt them from having to pay CGT when they sell. They are still within the six-year window since they moved out of the property and have not owned another main residence in that time frame.

What about partial exemptions?

There are instances where you may not receive the full CGT exemption, such as if you ran a business from the residence or if you rented the property out whilst you still lived there.

In this case you may receive a partial exemption however this gets quite complex based on your individual situation as CGT exemptions and charges are calculated daily. It’s recommended that you contact your accountant, tax specialist or the ATO directly to discuss how this may affect you.

This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the information is suitable for you and your personal circumstances. You should always seek advice from qualified tax and finance professionals before making a decision.