Tax Tip 105: Don’t Claim the 6 year rule where there is a capital loss

Discussion in 'Accounting & Tax' started by Terry_w, 29th Mar, 2016.

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  1. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    18th Jun, 2015
    Don’t Claim the 6 year rule where there is a capital loss

    Most readers will know about the 6 year rule whereby a person can be absent from their main residence, rent it out for up to 6 years, yet still claim it as the main residence and thereby avoid having to pay CGT. See Tax Tip 23: The 6 year Absent from Main Residence Rule

    But the application of the 6 year rule is optional – the property doesn’t need to be claimed as the main residence while you are absent.

    The sums should be done before claiming the exemption because in some instances there may not be a capital gain but a capital loss. If there is a capital loss you won’t have any tax to pay, but you will be a loss which can be used to offset other gains in the same year or, if there are none, the loss can be carried forward to later years. This could save you CGT in the future.

    As the market turns this could help save you tax.

    Example. Zheng bought a $500,000 property in 2010. He paid $30,000 in costs such as stamp duty and lived in it for 1 year. He then moved back home and rented it out. It was worth $510,000 at that point. A year later he later sold it for $520,000 but had to pay about $15,000 in costs for the sale.

    Zheng thinks he made a profit of $20k at first though. But doing the numbers his cost base is the value the time it first produced income which was $510,000 and $15,000 in selling costs.

    His cost base is $510,000 + $15,000 = $525,000

    Sale price is $520,000

    Capital Gain is negative $5,000 = a Capital Loss of $5,000

    So Zheng has actually made a loss, a capital loss. If he claims the absence from main residence rule (s118-145 ITAA97, the 6 year rule) then he won’t get to carry forward a $5,000 capital loss. So in this instance it may be best not to claim it.
    Gockie likes this.
  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Member

    18th Jun, 2015
    This rule is often confused with the main residence exemption. Where a property has always been your main residence then a choice is not available as the capital gain (or loss) is exempt. Any loss is totally disregarded.

    The 6 years rule is a choice a taxpayer can make when they first lodge a return to claim / not claim it s118-145(1) clearly describes it as a taxpayer choice.

    Moving from a former main residence into rented accomodation and not earning income is also a further example. There is no 6 year cap on capital gains. It is indefinite.