Tax Tip 23: The 6 year Absent from Main Residence Rule

Excellent. Thanks Terry!

 

Have you kept records of all expenses while living in property 2? Property 2 will never be CGT exempt, however the costs of maintaining the property could be used to reduce the CGT (so called third element costs) even while you are living in it.

Our PPOR has been rented out and we are now living in it, and it is surprising how these third element costs add up. Basically every cent you spend on keeping and maintaining the asset needs to be documented, here are some examples:
council rates
insurance (tip - split your insurance into two policies, one for the building and the other for the contents that you would take with you if you left, the building insurance could count as a third element cost, the contents not)
repairs and maintenance (replaced a light bulb? - add that to the list)

other costs to consider:
got a pool? the electricity to run the pump could be included, other electricity not
water for the garden? this could possibly be included

**I'm only advising to keep good records, I have a spreadsheet which I keep adding too and scan all receipts. I can't advise what can be included or not as I am not a professional or qualified

 

thanks for your insight.
Did you say while you’re living in it? During the time when it’s my PPOR?

 

Yes 3rd element costs while living in the property.

Tax Tip 86: Don’t be so fearful of generating income from the main residence Tax Tip 86: Don’t be so fearful of generating income from the main residence

 

Yes that's right - you will have CGT for the period from purchase to when you moved in, but costs for the period while you are living in it as your PPOR can be used to reduce the CGT, so after time the CGT will reduce.

One of Terry's tax tips covered this topic:

Tax Tip 240: Buying a Main Residence which is initially tenanted and CGT.

 

Except I only have records from 2011, but some of the rates maybe able to be obtained. But many would’ve been lost.

 

You are potentially throwing away money with your records!

 

Arghhhhhhhhhhhhh
Arghhhhhhhh

 

Great thread Terry, have learnt a lot from it.

How would the main residence rule apply if you owned a property that you were leasing out bedrooms whilst you lived in it? There is a 7 bedroom property I am looking at that currently has 4 tenants - 1 in each bedroom. If I were to purchase the property and move into one of the bedrooms and then in the future subdivide and build on it, would the CGT exemption still apply? Or do they apportion a concession based on how much of the house was your residence (ie if there were 4 other people in the house then 1/5th)?

 

The property is income producing so the exemption could not apply in full. You would need to apportion it for CGT.

6 year rule can't apply either as you are not absent.

CGT only applies when sold though, not on subdivision.

 

This reminded me of a ATO audit on this very issue. They opposed the pool pump on the grounds that the cholrination of a pool and the solar pump isnt pool maintenance. It maintains the water - for use. Its like claiming your toaster in the kitchen. They ummmmed and ahhhd then asked if the pump was separately metered then took the "diary" approach and in the absence of evidence struck it from the CGT calc. The hourly rate isnt useful for a plant item. And without separate metering its impossible to estimate.

Spot on that these 3rd element costs can really add up.

 

Many tax issues in this one. "They"dont do anything. The taxpayer needs to follow accepted practices and it must be a reasonable apportionment eg Aportionment based on area. and also time.... If room are made available they are subject to CGT even while between occupants etc. Consider total floor area based on tenant use, mixed use and private use.

What state ? Seek advice on land tax too. Your solicitor for proposed acquisition is best as it is legal advice. In Vic there is a "substantial use" test to consider where in NSW its limited to two tenanted occupants (Clause 4, Schedule 1A). OSR may consider the income production has a business like character. A private ruling could be needed.

And seek legal advice on council rules. Changes to a property approval etc may breach planning and your acquisition acquires that liability.

 

'They' are the cats mother
The state is Victoria, seems much more complex than I had anticipated. The apportionment makes logical sense as a product of both area and time spent in the dwelling.

 

Land tax doesnt consider time. Land tax is applied at a point in time. But any exemption often considers whether the property fulfils the tests of being a residence over a defined time. Hence you having a liability to repay the developer for something they legally incurred seems incorrect but is also commonplace. I have seen lawyers argue their client isnt liable

 

Fiance is currently living in her main residence and we are looking at purchasing an PPOR together in the near future. Her main residence will then become an IP. If she sells the IP after 4 years and elect to use the 6 year rule. What happens to our PPOR for that first 4 years?

I'm assuming the first 4 years on our PPOR is no longer exempted, or would it still be half exempted as it's my main residence? I'm assuming the date of marriage would play a part in the eligibility?

 

I can't answer this.

It will depend on when you became spouses.

 

Ok, assume we purchase PPOR in Oct 2020 and moved in then. We then get married in Oct 2022 and sell IP in Oct 2024.

 

You will need to get proper tax advice. marriage is not the definition of spouse really.

 

Hi guys! literally went through all 18 pages of this forum and I am amazed at how many combinations/permutations there are to apply this rule
thank you all for contributing to clarifying it!

I know there was a few discussions that touched based on renting part of the house out, but my question is -

Scenario:
- buying a 3BR house in June 2020
- living there as my main residence but also renting out the 2 other bedrooms to help with mortgage
- decided to rent out the whole house in June 2021 to live with parents
- decided to sell the house in 2025

Question:
1. does the 6 year rule still apply for the period after the house cease to become my main residence (in June 2021)
2. If so, does the capital gain tax when I sell in 2025 only apply to the year I lived there from June 2020 to June 2021 at an apportioned rate as the house was income producing at the time?

 

6 year rule cannot apply while you live there.
Tax Tip 135: The 6 year rule and renting part of your property out Tax Tip 135: The 6 year rule and renting part of your property out