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

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

 

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.

 

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

 

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

 

Time heals all wounds...

 

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

 

If he dies while it is a main residence

Tax Tip 231: Inheriting a former investment property and CGT Tax Tip 231: Inheriting a former investment property and CGT

 

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.

 

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

 

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