In this blog, we’ll discuss capital gains tax on primary residence and the 6-year rule that applies when you move out, and how to add it to your tax return.
CGT 6-year rule: How does it work?
Generally, your main residence is exempt from capital gains tax (CGT). A property is no longer your main residence if you stop living in it. However, for CGT purposes, you can continue considering it your main residence:
- For up to 6 years if you used it to generate income, such as rent (sometimes known as the 6-year rule)
- Indefinitely if you didn’t use it to generate income.
During the time that you consider the property as your main residence after you stop residing in it:
- It will be exempt from CGT.
- You won’t be able to treat any other property as your primary residence (except for up to 6 months if you are moving house).
For more information on how it works and how you can save money on taxes, you can reach out to the best accountant in Melbourne.
What are eligibility requirements?
If the property continues to be your primary residence, the common rules for the main residence exemption apply. The property needs to have:
- It’s been your primary residence first – you won’t be able to apply the main residence exemption to the time duration before a property first becomes your primary residence (e.g. you rented your home before you lived in it).
- Your property is no longer your main residence and is not used to produce income, which means you stopped living in it.
Search online for ‘tax accountants near me’ to seek help from them to ensure you meet eligibility requirements.
Partial main residence exemption
If you use the property to generate income, you may be eligible for a partial main residence exemption from CGT. For instance, when you:
- Run a business
- Rent the property (keep in mind that the main residence exemption rule doesn’t apply to the time period you rent your home)
- Flip the property (buy it to renovate and sell at a profit).
Former home not used for generating income
Your former home can be treated as your main residence for an unlimited time period after you stop living in it if you don’t use it to generate income. This only applies if you are not using another property at the same time as your primary residence.
Former home used for income
If you use your former home to generate income, you can treat it as your main residence for up to 6 years after you stop living in it. This is called the 6-year rule. You can decide when to stop period covered by your choice. For instance, if you rented it out for 5 years, you can treat the property as your primary residence for 3 years. If you are not present more than once when owning the property, the 6-year rule applies to each period of absence. A period of absence stops when you either stop renting your home and:
- Move back in
- Leave it vacant.
What if the 6-year limit is exceeded?
If you use your former home to generate income for over 6 years in one absence, it is liable to CGT for the period after the 6-year limit. To work out your CGT when you dispose of your income:
- You must work out your cost base, which is the market value of your home when you first used it to generate income, and any allowable costs since then (this is the home first used to generate income rule).
- Your capital gain or loss depends on the portion of time after first using your home to generate income, i.e., over the 6-year limit.
Former home used for income before you move out
Before you stop living in your home, if you use any portion of your home to generate income, you won’t be able to apply the continuing main residence exemption to that part. This simply means you won’t receive the main residence exemption for that part of your home either before or after you stop living in it.
Conclusion
The blog sheds light on the main residence exemption 6-year rule, eligibility, how it works, and common scenarios when you can apply for this exemption and when you can’t. For more help, you can seek help from Reliable Melbourne Accountants.