What is Capital Gains Tax?
6-year rule (Main residence exemption)
Capital gains tax (CGT) is the tax you pay on profits from selling assets, such as property.
This means that any profit made from your asset will be treated as income and will be taxed upon the sale of your asset.
Here is a link to a capital gains calculator:
https://www.ato.gov.au/Calculators-and-tools/Capital-gains-tax-record-keeping-tool/
Utilising the 6-Year Rule (main residence exemption)
We have no idea what the future holds. The 6-year rule is a great tool to protect your hard-earned money and keep your options open.
Renting out your first property from day one can limit your options. If life throws a curve ball and you are forced to sell a property that has been used solely as an investment, you will be liable for capital gains tax.
The way around this is to utilise the 6-year rule.
Your primary residence is the only asset in Australia you can sell completely tax free! The 6-year rule means you can rent out your old home for up to 6 years without having to pay any capital gains tax if you sell it within that period. There are, however, guidelines you must abide by to qualify for this tax exemption.
How does it work?
In essence, if you rent out your former home, you can choose to treat it as your main residence for up to 6 years after you stop living in it. This provision can only be used for your primary place of residence. I f you own multiple properties, you can only choose one of them to be your primary place of residence.
The following excerpt is taken directly from the Australian Government taxation web page:
If you use your former home to produce income (for example, you rent it out or make it available for rent), you can choose to treat it as your main residence for up to 6 years after you stop living in it. This is sometimes called the ‘six year rule’.
You can choose when to stop the period covered by your choice. For example, if you rented it out for 5 years, you can choose to treat the property as your main residence for 3 years.
If you’re absent more than once when owning the property, the 6-year period applies to each period of absence. A period of absence stops when you either stop renting your home and:
- move back in
- leave it vacant.
Other ways to avoid capital gains tax
Apart from the 6-year rule, there are a few other ways to be exempt from capital gains tax.
Other capital gains tax exemptions include:
- The 50% CGT discount – If you are an Australian resident and have owned your asset for 12 months or longer, you can reduce your capital gains by 50%;
- The 6-month rule – If you buy a new home before selling your old one, both can be your main residence for up to 6 months. To be eligible for this you must:
- Have lived in your old home as your main residence for a continuous period of at least 3 months in the 12 months before selling;
- Have not used your old home to produce income in any part of that 12 months when it was not your main residence;
- Be purchasing the new property to become your main residence.