Are you making the most of CGT exemptions when it comes to your main residence? Do you know what you are eligible to claim and how to go about it? Do you know the difference between the 6 months rule and the 6 year rule?
In a world where costs are constantly increasing, it is more important than ever to ensure that you are maximising any savings or exemptions that you might be entitled to, meaning that more precious money stays in your pocket. Here, we will look at the Capital Gains Tax exemptions that are available when it comes to your main residence, or Principal Place of Residence (PPOR).
What is Principal Place of Residence?
Whenever a property is occupied as a Principal Place of Residence (PPOR), it will be exempt from capital gains tax (CGT) for that period of time.
Read CGT and the Principal Residence Exemption to find out more about the requirements for determining and proving your principal place of residence.
CGT Exemption when You Buy Before You Sell – 6 month rule
Did you know that there is an exception for the one main residence only rule? Usually, you are only able to treat one property as your PPOR at any one time. Which means that you can only claim the CGT main residence exemption for one property at a time also. However, the exception to this occurs when you acquire a new home before you dispose of your old one. In this situation, both dwellings can be treated as your main residence for up to six (6) months if:
- the old dwelling was your main residence for a continuous period of at least three months in the 12 months before you disposed of it;
- you did not use it to produce assessable income in any part of that 12 months when it was not your main residence;
- the new dwelling becomes your main residence.
What if You Exceed the 6 month Limit?
If it takes longer than 6 months to dispose of your old home, the main residence exemption applies to both homes only for the last 6 months before you dispose of your old home. For the period before this, when you owned both homes, you can choose which home to treat as your main residence. The other will be subject to CGT for that period.
The ATO has prepared an example that highlights the options available when the 6 month limit is exceeded.
The 6 Year Rule
Under the 6 years rule, a property can continue to be treated as your main residence and fully exempt from CGT if it sold within six years of first being rented out, or used to produce income. However, there is a common misunderstanding of the 6 years rule.
In order to be eligible for the 6 years rule, the property must first be treated as an owner’s PPOR immediately, or “as soon as practicable” after the acquisition. A simple PPOR nomination will not be sufficient to claim the property as your main residence. To claim the full CGT exemption for a PPOR, you and your family must be physically move and live in the property “as soon as practicable” after the acquisition. As the property owner, you need to live in the dwelling for at least three months before they move out and use it to produce income. As mentioned above, see CGT and the Principal Residence Exemption for more details regarding requirements for determining and proving your principal place of residence.
If, after living in the property for a period of at least 3 months, you then move out of the PPOR property and rent it out, you are eligible to claim a CGT exemption for a period of up to six years after you moved out. When the dwelling is reoccupied as the main residence, the six-year exemption will be reset. So another six years of exemption is available from the date it next becomes income producing. It is important to note that this CGT exemption is only available where no other property is nominated as the main residence.
Seeking Professional Advice is a Must
Capital Gains Tax can be a complex area to navigate. With the 6 month rule and the 6 year rule only a small part of picture. While there certainly are many exemptions to potentially benefit from, there can also be many unwanted costs too if you fail to meet the exemption criteria. That is why it is important to seek the advice of professionals at all stages of the property ownership cycle, in order to ensure that you are making choices and taking actions that will not negatively impact your CGT liability, now and into the future.
The team of tax accountants and tax lawyers at The Quinn Group can provide individual advice to ensure that you are benefiting from any CGT exemptions that you might be entitled to. We can also advise regarding potential CGT liability and other related advice to help you make informed decisions for your situation. Contact us on (02) 9223 9166 or submit an online enquiry to schedule an appointment.
Updated 17 May 2022