Tax Tip 399: Claiming Expenses While Using the 6 Year Rule

If a person is absent from their main residence, they could still rent it out for up to 6 years yet still claim it as their main residence and have it exempt from CGT - potentially.

While it is rented out all the normal rules about deductions still apply.

If a person had borrowed to buy the property then once it is rented out they can claim the interest on the loan used to buy it, even if they plan to use the 6 year rule and sell the property CGT free.


Example

Bart is happily living with his parents and wants to build up wealth to help him achieve financial independence.

He buys a home in Sydney and moves in at settlement. It meets all the requirements to be exempt from CGT. Bart thinks it is costing him too much and he moves back home to live rent free with his family (thereby delaying their financial independence).

The property is negative geared to the tune of $8,000 per year. Bart can use this loss to offset his income from work and saves about $3,000 per year in tax as a result.

Bart rents the property for 5.8 years and then sells it for double what he paid for it, making a $600,000 capital gain which is tax free.

So not only did Bart get the tax free capital gain, but he also got the negative gearing benefits as well. This has allow him to bring forward his financial independence by 10 years or so and Bart decides to go and live in Bali and never work again.

 

A common misunderstanding is that while the property is "absent" no deductions can be claimed. The USE of the property must be considered. If the property is fully used to produce rent at market rates then interest (used to acquire / improve etc) can be claimed. The income tax and CGT issues are mutually exclsuive and can be independently considered as Terry indicates for Bart.

However, any other property Bart (or his spouse) reside in must also be considered. They cant each have one each and a choice to be absent and claim exemption affects other property they may own.

If a former home is not rented in NSW Bart may also even enjoy a temporary exemption from Land tax. he may allow Lisa to reside there and Lisa only pays some token costs and keep the place in good order. If he did that all ownership costs may then be third element CGT costs without any cgt costbase reset.