How to avoid Capital Gains Tax while renting out your house.
One downfall to renting out an investment property is that Capital Gains Tax (CGT) will be payable upon the sale of the property. CGT is the tax charged on capital gains that are procured from an asset, you are liable to pay this tax when your capital gains exceed your capital losses in an income year. However, there are legal ways to avoid paying CGT while renting out your house. Capital gains tax exemptions are allowed by the Australian Taxation Office (ATO) under certain scenarios.
People’s lives are constantly changing, as such there are many reasons why you may decide to lease out your main place of residence. In order to do this without incurring CGT it is important to be aware of the ATO’s guidelines with regards to CGT exemptions.
The following simple rules apply:
- Only your main place of dwelling will be exempt from CGT. Thus you can’t own two properties, live in one for a couple of years and then alternate between that property and your main residence while avoiding CGT on both houses.
- Usually, if you purchased a house after 7.30pm on 20 August 1996 you have to have lived in it when it was first bought (i.e. not rented it out) to be entitled to a full exemption. This is because if you rent the house out straight away the ATO deems you to have acquired the property purely to produce income.
- Provided the above terms are met, you may be exempt from CGT if you rent out your home for less than six years.
- If you’ve held a property for more than twelve months and the ATO has deemed you subject to CGT, you will usually be entitled to a 50% discount.
Capital gains tax is dependant on individual circumstances and as such things can become quite complex. Especially when how many properties you own and how frequently you move, get drawn into the picture.
If your house is nominated as your sole dwelling, you can usually rent it out for six years while living elsewhere. Once that period of time has elapsed you must return to live in that house for an acceptable amount of time in order to be allowed another rental period of six years. This process can generally be repeated for any amount of time and the property will remain exempt from CGT. The same can also be said if you rent the property out for six years, then leave it vacant from there on in. A tax payer can often still apply the six year exemption rule if they acquire and reside in another property. However there is no ‘Main Residence’ exemption applied to the second property which subsequently becomes subject to Capital Gains Tax.
In situations where multiple investment properties are acquired over a period of time, the ATO sees the six years as cumulative. This denotes that you only get six rental years in total before you are liable to pay CGT. Fortunately the CGT will be exacted proportionately. As a general example, this means if you reside in your main residence for twelve years before you rent it out for eight years, and made a $200,000 capital gain on the property after that, you will only have to pay CGT for the two year period that exceeds the six-year exemption. Thus the CGT would be exacted on $20,000 (being two years excess over a six year period divided by a total of twenty years owned).
PARTIAL MAIN RESIDENCE EXEMPTION AFTER 1996
If you originally bought your house with the intent to rent it out after August 20, 1996, but later changed your mind and choose to live there, you will become partially exempt from CGT on a proportionate basis of years lived in to years rented.
When there is a change of status from income producing to main residence or vice versa, you should obtain a valuation as of that date. A Real Estate Agent’s valuation should suffice, but a valuation from a licensed valuer is recommended.
Anyone subject to CGT should be aware of the following rules:
- Although there are provisions for farmers, properties over 2 hectares are not exempt from CGT.
- The residences of private companies and trusts do not qualify for an exemption.
- If you use part of your house in order to generate income, for example a home business, then CGT will be exacted on that section if you claim tax deductions such as interest rates, insurance or rent.
- If you have purchased a new property but are still in the process of selling the old one, you need to complete the sale within six months in order to avoid CGT.
- When it comes to deceased estates, presuming the house was the sole residence of the deceased, a full exemption exists providing the property is sold within two years of the deceased’s passing.
Capital Gains Tax liabilities, concessions and exemptions change depending on your individual circumstances, for this reason it is important to seek advice from a professional. Here at The Quinn Group our experienced team of accountants can assist you in regards to Capital Gains Tax. For more information submit an online enquiry or call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to book an appointment.