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

Many people use the 6 years. Remember its UP TO 6 years based on satsifying the tests. Just as many people fail to satisfy the whole period or even part of it many people have a situation where it can be used...When the think they pay tax. I suspect there are many DIY taxpayers who have ignored the 6 year rule and overpaid tax. The 6 year rule allows the taxpayer a choice. Usually wise if its taken. I have seen it a few times where taxpayers have checked a year or two later. In a few cases I have been able to amend and exclude their taxable gain as a exempt gain.

 

Interesting topic quite relevant to myself with a rather large looming tax bill (due to a large capital gain).
Bought property ABC in 2009 and lived in it until 2011. Bought property DEF in 2011 and moved in. Rented out ABC from 2011 and sold ABC in 2014. Currently still residing in DEF.

So, based on this we could use the 6 year rule on ABC?
Should we use the 6 year rule on ABC, as long as we never produce an income on DEF we will pay no CGT on either?

 

Yes, you possibly could have ABC claimed as the main residence.
But DEF will be subject to CGT.

 

Ideally live in all houses as you buy them, then you will have a choice of which one you choose to be the main residence for the absence rule. This choice only needs to be made after 1 of the properties is sold - i.e. do you claim that one as the main residence or not? If not then you still have the choice on the other properties.

If you don't move in straight away the property can still be the MR, but it will be subject to CGT based on no days lived in v rented out.

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

 

Terry correctly points out that the property must first be occupied as a residence before it can exempt and that exemption continue for up to 6 yrs under the relevant exemption. There is also a further key requirement that can be overlooked or over simplified in the chase for a tax saving.

It is not sufficient to merely briefly occupy to satisfy occupancy. ie move a bed in and stay a night or two before renovation etc The key requirement is to RESIDE. There is no time based test and appeals cases have included brief examples. What is imperative is that the person and their family should move in and occupy the property as a primary residence. ie furnishings, clothes etc.

It is possible for a taxpayer to satisfy this test for more than one property. If so the taxpayer may have a choice (called an election) and they do this in the way the treat the first CGT event. They may elect to take the exemption and in doing so yes it is exempt. However the taxpayer commits themselves to a future CGT event on the other property which cannot be exempt for those some days (other than in one example - the 6 month overlap rule)..

The other problem that some taxpayers are affected by is a change of tax residency. A resident taxpayer who becomes non-resident will have a CGT decision to make and should seek personal advice and never assume reliance on the 6 year rule.

 

Perhaps. See my previous post about occupancy v's residing.
Correct, if you don't RESIDE in it the exemption can never be considered. My prev post addresses the election a taxpayer may make.
Yes. An IP cannot have a main residence CGT exemption applied unless it was a PPOR at some point. If occupied years after acquisition and later re-let the absence rule may apply from that time.

 

Just for my parents case

They had a PPOR then bought some land but didnt build on it for i think 7 or so years whilst still living in their PPOR.

They finally got a house built on the land. They then sold their PPOR and have moved into building on the land which they had for a good 7 years or more before doing anything with it.

How does this affect capital gains?

 

It can't be their main residence until the point that they lived in it. If they did build and live in it within 4 years of purchasing the land the main residence exemption could have applied back to the date of purchase.

 

Terry what about this case. I'm getting conflicting answers about apportionment:

1. Purchase 2008. Tenants there for 9 months.
2. Move in 2009. Stay for 3 years.
3. Move out 2012 put tenants in.

Will I pay CGT on the whole of the period or is there any rule allowing apportionment when I did not move in immediately (because of a lease Expiry date)

 

Because you rented out the property first CGT will be worked out on a forumal basis - no days rented out v no days lived in.

 

Cool, so I still get some reduction pro rata for the time lived in.
But the 6 year rule is not allowed.
Thanks

 

I would think the 6 year rule could be used. Your owner occupied days could include any days you were absent but still claiming it as the main residence.

 

What about the requirement that you must move in "as soon as practicable"? I've been told that having a tenant there does not count as reasonable excuse for not moving in, and that if you don't move in straight away you can't get the 6 year rule?

 

INCOME TAX ASSESSMENT ACT 1997 - SECT 118.185 Partial exemption where dwelling was your main residence during part only of ownership period

 

I have been thinking about another PPOR in a different area.

The PPOR now will not be sold, at least not until we know we are happy with the new area.

So

Current PPOR will be CGT free if we do sell in the 6 year period, understand that, but.....

What if you decide you want to sell the new PPOR ? is there any way to do it with both CGT free legally if the sales are staggered ? What about if you then move back to main residence and rent out the second PPOR rather than sell, how do those scenarios play out ?

If it was straight forward, and within the 6 years you sell main PPOR as the second one works out well, then after selling that one CG free, if you want to upgrade what is now the main PPOR, do you have to account for cross over time of second PPOR ?

I also assume you need to say the newly bought PPOR as being the main residence when you buy (instruct solicitor).

This is our current plan

 

Oh, and how does the land tax play out in NSW, I assume you can't also get away with the extra land tax when PPOR 1 is worth a lot more land wise than PPOR 2 ....

 

Both cannot be exempt from CGT, only one. (unless you sell within 6 months of purchase)

Portion of the 2nd would be subject to CGT

No this is not needed.

 

Land tax is totally different. The absence rules are much stricter, and more complex, and you generally wouldn't get an exemption unless the house was not income producing.

 

Thanks Terry, it is really a no brainer with what I am thinking as the new PPOR is not likely to increase by much.

The income will make the land tax a non issue really.

Cheers