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

Thanks @Terry_w for such a prompt reply!!

Sorry if I misunderstood you, but I meant would the rule apply after I move out in a year of living there?

 

it could potentially apply, but you would want to make sure it applies to the whole property

 

Would it not apply to the whole property if I rent the whole place out after a year?

 

not if you had been renting rooms out.

 

So can you literally live there for 2 weeks and then rent it out and get exemption? are there cases where people got into trouble for this?

 

If they established the property as their main residence. A short time frame might suggest it is not though

 

would it be regarded as their main residence as long as they change all their addresses, connect gas/electricity and bring in their belongings etc albeit for a short time frame?

 

Merely changing addresses will not make it a main residence.

 

That isnt correct. These are some of the signs someone may have established a residence. It may not meet the test of being a main residence. and intended to be their home for the forseeable future. Moving in with intention to depart in 2 weeks is a prime example as may be moving some few items in with a plan to move out soon after. All short duration situations should be considered a risk and supporting info retained. Evidence to support intention to remain can include installation of foxtel on a contract for example. I have even seen photo's used. These records should be retained until 7+ years aftre the property is sold. Even longer is moving to another property - keep 7+ years after the lattter property is sold.

That said I have seen examples of people moving in with unexpected reasons making them depart. Important they retain some evidence if the ATO ever challenge this eg a client example = soldier buys his first home and moves in. That very night he turns up at base and is given orders to be deployed interstate. Army pays for his relocation etc. he keeps copy of the orders etc. He moves interstate and remains there and meets a girl. ATO later do query his main residence position when he sells. They are satisfied to the reason to be absent. The gain after 4.5 years is tax free.

 

Hi Terry,

First of all - thank you so much for all the invaluable info you provide on this site and in particular your blog posts! I have found them so helpful.

I bought a PPOR in 2010 and lived in this property until March 2016 (which was since rented out and I live elsewhere).
From what I understand, if I sell this property prior to March 2022 (6 years) it will be exempt from CGT?

Cheers!

 

It could be, but it will depend on a lot of other things

 

Any one major thing that jumps out?

Will have to revisit this when 2021 rolls around I think..

 

I can't really comment but see my tip on not all main residences are exempt from cgt

 

This is why I can't say that it will or won't be exempt, but it could be:

Tax Tip 165: Not all Main Residences are Exempt from CGT https://www.propertychat.com.au/community/threads/tax-tip-165-not-all-main-residences-are-exempt-from-cgt.26254/

 

This is a terrific example of where confirming a personal situation with personal tax advice is wise. This is where reliance on basic information on a forum post can be dangerous. There are numerous matters that could mean the property is not exempt, is partially or even fully taxable. Property savvy tax advisers may quicly discuss this and confirm or assist identifying the key issues . Examples of issues that could mean its not 100% exempt :
- Property was used to produce income while you lived there
- Property was rented on a short stay site at any time while you lived there
- Property your spouse / partner also owns eg you moved out and live with partner.
- You were non-resident at any time
- You didnt occupy the former homea s soon as practicable after acquisition
- You rented a room prior to moving out
and more

And of course the issue may be that there isnt a gain to be exempt. Or the tax impact on where you now live outweighs the exemption being claimed. (this is because if you claim the 6 year absence exemption the same period cannot also be exempt for any other property. Even if you dont own it !!)

 

Yeah obviously will be seeking professional advice before making any moves. This is really helpful as I was planning on selling this IP in the next 5 years so in this case moving it up a year or two to save CGT makes sense.

Thanks Paul!
I'd answer No to all of these except "You rented a room prior to moving out" as I moved out, did some improvements to the ex-PPoR for a month before renting it out.

Had a read through Terry's post on not all residences being VGT exempt and none apply, so we are looking positive.

 

The list wasnt complete... I referred to you renting out a room in the former main residence prior to moving out, not renting elsewhere while you renovate.

eg Dave is planning to move from his home. He has a boarder who rents one of the two bedrooms who shares the residence. He moves out and then rents the other room out. He rents in another suburb. The absence rule (max 6yrs) would be only 50% applicable since 50% of the dwelling produced income at the time of the absence commencing. Yet if he had punted that occupant before he left and then left and then rented the whole dwelling it may be 100% exempt for up to 6 years.

 

Well in that case the answer is "no".
And I read through Terry's blog post noting all the reasons why it wouldnt be exempt and it is looking good.

Obviously I dont take this to mean 100% that it is exempt but is a good first step in the right direction.
Appreciate the help.

 

my list wasn't exhaustive either.

But if you have checked it there is a high probability of being able to keep the property exempt from CGT

 

Hi Terry, I have read through many of the responses here and apologise if this question/example has been covered in the previous 18 pages of responses.

Family home purchased in June 1988 for $91,000 and lived in until April 2017. Started renting it out in April 2017 and will most likely continue to rent it out and not return within the 6 year CGT free period. We have no other PPR as we are retired nomads and travel full time.

Assuming we sell the property in June 2024 (using this date for ease of calculation) it will have been income producing for 7 years. Lets also assume the sale price is $791,000 therefore $700,000 capital gain (ignore cost base issues, etc)

Looking at the examples on the ATO websitepage - https://www.ato.gov.au/general/capital-gains-tax/your-home-and-other-real-estate/your-main-residence...

Example 8 - "Dwelling stops being the main residence and is used to produce income for more than six years during a single period of absence"
appears to be the same scenario.

The example calculation they use to determine the Capital Gains Tax is:

Capital gain amount x (total days rented in excess of 6 years divided by total days property owned)

Using my figures:

Capital gain = $700,000

Total days property owned = 13149 (June 1988 to June 2024)

No. days in 6 years = 2191

Total days rented = 7 years = 2608

Total days rented in excess of 6 years = 2608 - 2191 = 417

Total Capital Gains Tax using the above calculation = 700,000 x (417 / 13149) = $22,200

Is this correct?

I'd like to make sure my understanding is correct.

In summary, is CGT calculated as a ratio of the number of days rented in excess of 6 years in the total ownership period times the capital gain amount?

OR

is CGT calculated as a ratio of the number of days in excess of 6 years with the cost base being the property valuation at the start of the 6 year absence?

Thank you in advance.