Tax Tip 233: The 6 year rule when moving into an IP and then out again

Discussion in 'Accounting & Tax' started by Terry_w, 26th Aug, 2019.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    I have described the 6 year CGT rule here:

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

    Basically, a person can move out their main residence and rent it out and in some circumstances, it will still be exempt from CGT.

    Some people have misunderstood this and believe that you can move into an investment property and then move out again and the property will become CGT exempt. This is certainly not the case, but this strategy can still save CGT when the property is eventually sold.


    Example

    Bart is living at home with parents and buys an investment property to rent out. He doesn’t live in it initially as it is a bit far from his place of work.

    After a while Bart realises that he is 25 years old and still living with his parents. So he moves out and into the investment property. He stays there for 1 year before losing his job and then he moves back home. Then he sells the property 5.99 years later.

    Let’s throw some dates in

    • 2000 purchase
    • 2005 Bar Moves in
    • 2006 Bart Moves out
    • 2012 Bart Sells

    Period the property is held in total is 12 years.

    Period the property was the main residence is 1 year, plus up to 6 years using the absence rule = 7 years.

    This means that 7/12 or 58.33% of the time held it was a the main residence so CGT will only apply to 41.67% of the profits

    Had Bart not moved in it would have been 100%

    Had Bart not used the 6 year rule it would have been 11/12 or 91.67%


    Note that Bart will still have to work out the cost base of the property and then apply the 50% CGT discount as well. There might end up being very little CGT payable.

    Also it is irrelevant what the property was worth when Bart moved into and out of the property
     
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  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    If Bart dies after moving in it could generate a CGT exemption that wipes the past accrued tax period. Hard to plan I will admit although some states and the nation of Switzerland have changed laws that may assist the strategy. Its a bit of a dead end (pardon the pun) strategy and usually only may assist a person with known terminal illness etc. If they already have a family home (exempt) then the strategy fails as you cannot have two exempt properties for any days excepting if one is to be sold within 6 months.

    Its important that Bart commence residing as his MAIN residence. It involves more than just moving in. The property of any spouse, defacto etc may impact this as a family cannot have multiple main residences without impacting each other.
     
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  3. paulF

    paulF Well-Known Member

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    So the longer Bart lives in the IP as a main Residence, the less CGT he will pay.

    Seems like there is a formula to get to the amount time that Bart would need to live in the IP as a main residence to completely cancel CGT... Will try and do the numbers later on
     
  4. Hamish Blair

    Hamish Blair Well-Known Member

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    Bart can only have one MR at a time too? When does he have to decide this?
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    Time heals all wounds...
     
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  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    yes, but would only need to decide on sale of the first of the properties he owns.
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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  8. Dileepa Fernando

    Dileepa Fernando New Member

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    Hi ,This is my case. Appreciate your valued comments/advice.

    1/06/2014 Bought the house at Roxburgh Park

    15/12/2014 Rent the house at Roxburgh Park following an accident and went to live with in-laws. (Roxburgh park property is on rent till now)

    1/01/2018 Bought the second property in Craigieburn and currently living in this property since Jan 2018.


    If I move back to my first property in Roxburgh Park now, will I be able to claim it as the primary place of residence.

    Will I be able to qualify for CGT exemption with the 06 year rule in case if I stay there (Roxburgh Park property) for the next 12 months or more?

    Thanks.
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    possibly, it will depend on the details. You should seek tax advice on if you can and what the consequences could be.
     
  10. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    You will have choices. I replied to your other post on the same issue.
     
  11. Frank M

    Frank M Well-Known Member

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    Hey @Terry_w Could I pick your brain on this please!

    Similar position as Bart

    Brought 2014-Rented out straight away

    Wanting to move in property late 2020 for 1 year then move out, hold for another 5 years using the rule

    So when I sell at the 12 year, I will be exempt for 6/12 years for CGT and then additional 50% discount for those 6 years.

    Main questions is after 1 year I move out, and then start renting it out agian for 5 years untill sale, will it still be a investment property for tax time and still receive benefits as I would usually for those 5 years I rent it out after I've moved in and out?
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    could be totally CGT exempt potentially.

    If rented you could claim all expenses as per normal - yet still be CGT free.
     
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  13. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Also consider where you will live when you move out. If you own it, or its a partners property there is still a CGT consequence for that asset even if you dont own any part of it. It may provide more tax choices to be applied to the first property sold.

    The "what if" scenario is often a bit more clear cut with a property that commences life as IP. This sets the historical costbase (incl acquistion costs) and it wont change unlike someone who first rents a former home. But in the period you live there for 12mth you can also add non-deductible ownership costs to the costbase. But the costbase may be reduced for QS deductions claimed for 11 of the 12 years.
     
  14. Frank M

    Frank M Well-Known Member

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    Okay thanks

    Plan is to move in it for 1 year make it my PPR then, move into my girlfriend's property that will be built about the same time I move out which we plan to stay at her property for at least a few years till we buy a property together