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.
FULL EXEMPTIONS
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.
PARTIAL EXEMPTIONS
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.
John Turkieh says:
I bought a property in 1998 and rented it out for 1year the i moved into the house and lived in for 6 months then i rented it out for 3 years thn i moved in again and lived in it for 4 months and then i rented it out for 6.5 years and finally sold in June 2010. I would like to get an advice on CGT liability, My understanding according to information read on the ATO site and the examples provided is that i have to pay CGT fot 18 months on pro rata bass.
Please advise how much it will cost me to get the advice and to fill out tax returns for 4 years, Information will be provided in separate excel spreadsheet for each year through email because i reside overseas. Regards.
August 13th, 2010 at 6:06 am
John Turkieh says:
I would like to add that yhis is the only property i had in Australia. Regards
August 13th, 2010 at 6:09 am
Michael Quinn says:
Hi John
Someone from our office will be in contact with you shortly
Kind Regards
August 16th, 2010 at 4:00 pm
Ellen says:
Hi,
My partner purchased a property in March 2008, lived in it full-time until it was rented out in September or October 2009. If we sell it now, will it be exempted from the CGT?
Thanks!
October 13th, 2010 at 11:28 am
Michael Quinn says:
Hi Ellen
Someone from our office will be in contact with you shortly.
Kind Regards
October 13th, 2010 at 12:22 pm
Sue says:
I won a property in a competition and was going to rent it out as I am paying off my own home. What taxes do I have to pay I would not be making much money on the rent as it’s a low rental and the rent will cover Insurance, Maintenance, Real Estate Fees, etc so I won’t make a big profit on rent probably 3k a year if that.
I was just going to hang onto the property for the future as in investment. Will this be worth doing or will I have to pay taxes etc.
November 24th, 2010 at 5:55 pm
Sue says:
Sorry I left out the value of the property which was $55k, it’s a little miners cottage.
The rent I would receive would be minimal maybe $100 per week.
November 24th, 2010 at 5:57 pm
Michael Quinn says:
Hi Sue
Thank you for submitting an enquiry.
Someone from our office will be in contact with you shortly.
Kind Regards,
Michael Quinn
November 29th, 2010 at 1:51 pm
Donna says:
I bought a property in 2001 for the sole purpose of living in it. In 2003, I met my husband and in 2004 we decided to rent it out. It is still currently leased. We are considering selling next year, which will be over the 6 year rule by about a year, does the above mean that we will only need to pay capital gains for 1 year?
Thanks
December 4th, 2010 at 2:11 pm
Michael Quinn says:
Hi Donna
Thank you for your enquiry.
Someone from our office will be in contact with you shortly.
Kind Regards
December 8th, 2010 at 9:06 am
Shelly says:
Hi,
I bought an investment property 3 years ago (year 2007) and rent it out since then. Now I am moving back to renovate this place. I want to avoid capital gains in the future when I want to sell, is it worth getting this property revalued by a professional? How long should I live in this property before I sell it?
Thanks
Shelly
February 4th, 2011 at 5:36 pm
Michael Quinn says:
Hi Shelly
Thank you for your enquiry.
Someone from our office will be in contact with you shortly.
Kind Regards
February 8th, 2011 at 9:28 am
Adela says:
Hi when i bought my unit the condition was that i could not kick out my tenants untill the lease had finished. I would have had it rented for 3 months before living in it. Do i need to pay capital gains if i sell. I have lived in it for over 1 and a half years.
Regards
Adela
February 15th, 2011 at 5:00 pm
Nick says:
Hi there, I own a property in melbourne which i lived in, for approximately the first 7-8 months, then decided to rent it for the past 8 years. I ‘ve rencently moved back into the property for the past 6 months however am in two minds whether i should buy and sell. In the time my house would of doubled in price, then again so has every other house. Just wondering if i’ll be slugged CGT?
February 17th, 2011 at 1:05 pm
Paul says:
Hi,
I am trying to understand my liability for CGT on the following, and have heard so many versions, I just want to understand the right one…
We jointly purchased our family home in July 1992 and then in December 2001 had to move overseas for work, and decided to rent the house out. It stayed rented till we returned in April 2006, when we decided to buy a second home and treat this as PPOR and left the property rented out. We finally sold the property in July 2010 and now I need to understand does any of this exemption for 6 years and pro rata after apply and against what initial value for the property.
I.e is the value to calculate the gain against from the sold value just the 2001 value or is the 6 years exempt and only pro-rata beyond the 6 years and applied against which initial value.. 1992 value or 2001 value ?
Best Regards
Paul
February 18th, 2011 at 12:43 pm
Con says:
Hi,
I am thinking of selling my investment property, but would first like to get a full understanding on how much CGT I will have to pay.
I have had the investment property for 4.5 years, and within this time, I had lived in for 3 months in year 2.
I have been using some online CGT calculators and its coming to some ridiculous amount of $30,000.
I have a few questions on the expenses you can claim to lower the CGT (e.g interest on investment loan, rates etc etc) however I am unclear if I can claim all these amount for the full 4.5 years, or just for the current taxable income year (2010/2011).
Thanks
February 27th, 2011 at 9:40 am
Michael Quinn says:
Hi Con and Honda
Someone from our office will be in contact with each of you shortly to assist with your questions.
Thank You
March 2nd, 2011 at 8:34 am
Adam Jones says:
HI,
I have lived in my house for 5 years and have put it on the market to sell. After being for sale for 3 months without any bites, we have decided to rent it to a family member until we get a sale. Will we be have to pay CGT because of this?
Thanks, Adam
May 30th, 2011 at 11:32 am
Justin says:
Hello
I purchased my first property in 2007 with the FHOG. I rented it out for first 12 months and then moved into for 1.5 years. I have sinced rented it out for 1.5 years. If I sell the property now will I be liable for any CGT?
I purchased a second property recently which I intend to move into in 6 months. If i rent the property out for 6 months and then move into it and live in it for say 5 years before selling will i be liable for any CGT?
Thanks
May 30th, 2011 at 11:54 am
Fiona says:
Hi,
I am thinking of relocating to France and keeping my property here as an investment property. What would my options be please for avoiding CGT upon the sale of that property in the future. I only have the one property which I have lived in for the past 5 years would I need to return to Australia and live in my house here for a period of time?
If you can please advise on this.
Many thanks.
May 30th, 2011 at 2:48 pm
Michael Quinn says:
Hi Adam
Thank you for your enquiry.
Someone from our office will be in contact with you shortly.
Kind Regards
May 31st, 2011 at 4:24 pm
Michael Quinn says:
Hi Justin
Thank you for your enquiry.
Someone from our office will be in contact with you shortly.
Kind Regards
May 31st, 2011 at 4:25 pm
Michael Quinn says:
Hi Fiona. Thank you for your enquiry. Someone from our office will be in contact with you shortly. Kind Regards
May 31st, 2011 at 4:26 pm
Amanda Ganley says:
Hi There,
My partner and i purchased a property 3 years ago. We spent a year living it ourselves while renovating it. After the year of being there alone we rented out our 2 spare bedrooms. We paid tax on the money. The house has quite a big mortgage so me and my partner decided to sell it. We stopped renting out the rooms 6 months ago so we wouldn’t have to pay cgt on the 6 year rule. We are now trying to sell the property but due to the economic downturn we aren’t getting alot of interest. Instead of renting out rooms again we wish to rent the whole property out for a couple more years but still sell within the 6 years.
To avoid paying cgt do we need to move into the property again for 6 months before selling or will the fact we took it back for the last 6 months as our main residence be succifient.? Also does the 6 years start from the day we bought it or from the day we started renting out the rooms?
Many thanks
June 5th, 2011 at 10:46 am
Ryan says:
I have two rental properies.
The first I bought in 2001 and lived there for 3 years. It has been rented since, as still is.
The second, I bought in 2004 and lived there untill 2010.
I am thinking of selling one, preferably the first one, but I believe I the second would only be able to be sold CGT free and not the first. I would be willing to move into the first for 6 months if it saves me alot of $.
What would be my best option?
June 7th, 2011 at 9:18 am
Michael Quinn says:
Hi Amanda and Ryan
Thank you for your enquiries regarding CGT.
Someone from our office will be in contact with you shortly.
Kind Regards,
Michael Quinn
June 8th, 2011 at 9:42 am
Lauren Campbell says:
We have owned our property since 2003 and lived in it until 2005, and have been renting it out until now. As it has now been 6 years we have moved the tenants out and intend to make it our primary residence. Can you advise how long we must remain in the property before we can rent it again, and avoid CGT?
Thank you
June 9th, 2011 at 12:47 pm
Adam Davidson says:
Hi,
I purchased my house in January 2003, it was rented out for until i moved into it in Jan 2007- it has been my main residnece ever since. When i moved into it in 2007 the market in myy area had been fairly flat, and the house hadnt appreciated much, but since moving in the cvalue has increased a fair bit. WIll I be paying captial gains tax on gains that happened after i moved back in? Overall does the tax rate reduce the more years i live in it?
Cheers,
Adam
June 14th, 2011 at 12:57 pm
Katicza says:
Hi there - I bought a property in NSW in Dec 2004 for 282k as owner occupier. I’m about to sell it in 2011 for 400k. In the meantime, in Jan 2007 we rented the NSW property out and moved to Victoria, and in Feb 2009 in VIC we acquired another home as owner occupier for 415k. My rough undertanding is that either property could be ‘main residence’ and so CGT exempt, but how do I work out which one we should nomiate? Thanks
July 5th, 2011 at 3:23 pm
Susanna says:
Hi There, We’re looking at buying a property and then staying with family while renting it out for a year before moving into it ourselves.
If there are already tenants in there when we buy it, and they stay in for 6-12 months, do we have to pay CGT when we move in? Or when we sell it? Or at all if it is only for a short period of time?
Alternatively, if there is not tenants in it, and we buy it and then rent it out while staying with family, do we have to pay CGT for the 6-12 months that it is being rented out before we move into it?
Look forward to hearing back from you
Thanks
July 22nd, 2011 at 10:29 am
theresa arlidge says:
i have a property i have lived in for 2 1/2 years and have decided to rent it out ive also just brought a new place with my partner under both of our names which we will live in if i sell my rental say in 12 months will i have to pay capital gains
July 24th, 2011 at 6:17 pm
Jennifer says:
I purchased a property in 2009 Jan and moved in it straight away. I stayed in there for over 12 months then rented out the property as we went overseas. I directed all my mail to my daughter’s place for all this time I’ve been away from Australia. THe property has been leased out for 1.5 years now. I want to sell the property as I no longer have use for it. Would I be fully exempted from capital gains tax as this is the only house that my partner and I possess? Thank you
August 4th, 2011 at 11:16 am
Richie says:
Hi there I purchased a property 3 years ago. Lived in it for 6 months then rented it out. If I sell it now, how many month do I have to move back into the property to avoid paying capital gains?
September 21st, 2011 at 11:49 am
Nolene says:
Hi
I am an Australian Citizen who has lived abroad since 1982. I purchased a property in 2004 which has been rented out for the entire period. I am now planning to return to Australia to live. Will I be able to avoid paying Capital Gains by living in the property for a period of time? If so, what would be the minimum amount of time that I would have to live in it?
Many thanks.
October 3rd, 2011 at 10:17 pm
Gina Vo says:
I bought a house last year July 2010 with the intention to live by myself. But after I bought the house my family all against me moving out by myself before I get married. It is not acceptable in a strict family like mine so I rent it out. Now I will get married in 4 months and want to buy a house because my tenant contract isn’t up yet and my fiance has his own home as well so he cant buy the house under his name. what are my options to buying another house?
October 5th, 2011 at 2:20 pm
Ash says:
Hello,
I purchased a land in 2008, builted a house and moved into it in 2009 for 7 months and then rented out. If i sell this home (which is still an investment property) before 2013 (within 6 years) then will i avoid any CGT on the gains that i have made all this while?
Also, if i decide to move into the property within 6 years (purely to save the CGT), then how long do i have to stay in there before i can move out again in order to avoid any CGT on it?
I went to a property seminar at Convention Centre here in Melboure last weekend and spoke to some experts there who couldnt answer my question and asked me to refer to the ATO’s website however i was told that as long as i have lived there for atleast 6 months straight after i had bought the property then i wont incur any CGT if i sell the house within 6 years from the date the final settlement of the house was done.
Can you please advise.
Cheers
October 10th, 2011 at 9:05 pm
Charis says:
hi there, i bought a property in 2006 lived in it until 2011 and now its rented. I bought a second property which is my PPOR. Am i able to rent out my first property for 6 years and be exempt from CGT? Or because i have a second property am i not exempt?
Thanks!
October 13th, 2011 at 7:52 am
David says:
Bought an IP in 2007 for 335k. Just had an offer of 645k. Has been rented since buying. As I’m in mining the CGT is ridiculous. What can I do ?
October 25th, 2011 at 7:29 pm
Dean says:
Hi I am selling a house (my main dwelling) and I am buying an apartment, If i live in it for 12 months then rent it out, and sell it within 6 years do I avoid CGT ?
October 25th, 2011 at 9:04 pm
Tom says:
I bought a condo and rented it out for 5 years. Then I moved into it for 2 years which I believe now exempts me from capital gains tax. But if I now rent it out again for 2-3 years and then sell it, will I have to pay capital gains tax?
October 28th, 2011 at 11:43 am
Stacey says:
Hi there, i bought a property in Dec 2007 lived in it until Dec 2008 and now its rented. I bought a second property which is my PPOR. Am i able to rent out my first property for 6 years and be exempt from CGT? Or because i have a second property am i not exempt?
Thanks!
October 30th, 2011 at 3:38 am
Sandra says:
I purchased my rental property May 2010 I want to sell it to reinvest in another property. I would like to pay off some of my debt. How can I avoid capital. Gain tax. I need advise before I sell.
November 3rd, 2011 at 1:11 pm
Sarah Lamanna says:
Hi,
We have recently sold our home & are considering a new property. We have decided we would like to buy & rent the property out for the 1st year while we travel around Australia & come back to live in it & eventually upgrade to a bigger home. Is there any wag to do this & avoid capital gains? It will be our only property & we will come back to live in it, & could possibly move in temporarily to help avoid CGT.
Any suggestions on how to avoid CGT would be great, thank you
Sarah
November 10th, 2011 at 6:36 am
Edita says:
I purchased my property in May 2002 and lived in until November 2003 when I went to work overseas. I rented the property while I was away and now when I am back I would like to sell it. How long do I need to live in the property in order to be exempted from CGT?
November 14th, 2011 at 8:17 pm
Wendy says:
Hi I’m hoping you can help or offer advice. I have owned my home for approx 12 years and have just purchased another property with my partner which we are living in full time. I have now placed tenants in my original home. Will I be liable for CGT when I sell the home I lived in for 12 years? And also, as we borrowed 100% of the value of our new home it’s considered an investment property. Will we still have to pay CGT when we sell it (this isn’t planned and would hopefully be over 12 years down the track) or is there a way we can avoid this as we are living there full time.. it’s all very confusing!
November 15th, 2011 at 12:46 pm
juntang lu says:
I bought house for myself living from 2007, and bought another house for rental from 2009. Now I am going to move in the second one and rent out the first house. please tell me which way I should to do to avoid or reduce the CGT?
November 16th, 2011 at 5:34 am
Maria says:
My son bought a house in 1 March 2001 before going to Europe for a 6 month holiday with the intention of living in it when he got back. He rented it out about 1 month after settlement. He extended his stay to Europe and in fact has not come back to live in Australia to date. His house has been rented (with breaks between tenants) for the entire period he has been out of Australia. He also took a FHOG and had to pay this back. He now lives in the UK and has purchased a house there. I understand he will be up for CGT when he sells the property and was wondering how this would be calculated or there are any loopholes that would exempt him from CGT. Thanks
November 25th, 2011 at 10:03 am
Dustin says:
Hi, i have purchased an off-the-plan property in Victoria state, which will be ready in Dec 2012 (intention is to rent it out from day1). At the same time, I am thinking of purchasing a property in NSW and make it my Primary Residence (am currently renting a place in Sydney). Before i make any new purchases, i would like to know what are my CGT liabilities and scenarios. Can someone from your office pls contact me? Thanks.
November 26th, 2011 at 3:17 pm
Luke Jenkins says:
Hi,
My partner and i purchased a property in September 2008, lived in it full-time until renting it out in March 2011 and purchasing another house to live in. If we sell it now, will it be exempted from the CGT?
November 27th, 2011 at 6:34 pm
Robert Gibson says:
Is there anyway of avoiding CGT all together?
Whats your advise if im going to purchase many properties over the next ten years to avoid CGT?
Regards
Robert
December 21st, 2011 at 6:32 pm
Kristy says:
Hi,
I purchased a property in February 2007 and lived in it until September 2008 and have since then rented it out.
Would I be exempt from CGT if I sell next year?
Thanks for your help,
Kristy
December 24th, 2011 at 9:31 pm
shane haley says:
hi ,
i purchased a property in 2000 lived for 6 months to a year then have rented it out ever since.
we are about to have a baby and are considering moving in to this property to save money as the loan is less than my current place (if we decided to do this we will rent out our current place). if we decide to sell this property in a year or two will i have to pay CGT!
January 13th, 2012 at 10:53 am
Mrs Thomson says:
Hi Please help
I bought a property in UK during 2003 and rented it out.
I’ve never lived in this property & have no intention of doing so.
Will I have to pay Capital Gains Tax if I sold this property 2 yrs after becoming an Australian Resident?
Thanks For your help
Mr & Mrs T
January 19th, 2012 at 5:26 am