Tax Q&A: What do I need to know about CGT?

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Q: I hope you can help me with a couple of questions in relation to capital gains tax exemption. I own a property in Frankston, Victoria, which I purchased in July 2015. For the first year, I lived in the property (July 2015–August 2016), but from August 2016 onwards, the property has been rented out and I have been renting another place in the city.

I have a few questions in relation to potential CGT on this property:

  • How does the six-year CGT exemption rule apply here?
  • When does the six-year term start and finish?
  • By when would I need to sell the property to avoid having to pay CGT?
  • If I am looking to buy another property, do I need to sell this property first to avoid CGT, or can I just put it on the market and start the process of selling it?
  • If I did end up having to pay CGT, what is the percentage that I would have to pay in tax against the capital gains amount; ie if the property has gone up by $150,000 in value, how much CGT would I have to pay?
  • Any help or advice you have on this would be greatly appreciated.

Thanks, Hayley

A: The ATO allows you to move out of your main residence and rent your property out for up to six years without having to pay capital gains tax (CGT). During this time, you must not have another primary residence, only the vacated property.

The six-year term starts when you vacate the property and it becomes available for rent. The period ends six years from this date. It is important to have clear documentation to show when the property was first made available for rent, and especially the date when you move back in if this is close to the end of the sixth year. This will help in the event of an ATO review. In your case, the term would start in August 2016 and end in August 2022.

To avoid paying CGT, you would have to sell the property prior to August 2022, six years from the time the property was first rented out. Alternatively, you could move back into your main residence, live there for a while and then move out again, renting the property again. The six-year period would end when you move back home and start again once you move out. This resets the clock. Moving back in to live in the home would also mean you would not need to pay CGT.

If you are looking for another property, selling the original property before the six-year term ends would avoid CGT being payable. Alternatively, many decide to keep their homes and turn them into investment properties. In this case, CGT would apply, but only to a portion of the gain.

Many decide to turn their homes into investment properties. In this case, CGT would apply, but only to a portion of the gain

If you were to move back home while looking to buy a new primary residence, the ATO would allow you to treat the newly purchased property and the old property both as main residences for up to six months. However, this would only be applicable if you lived there for three out of the 12 months before you sold it and there was no rent being earned from the property.

We always recommend, with all these questions, talking to your accountant about your particular situation. Every situation is different, and it’s important that you get the appropriate advice. This small investment could end up saving you thousands of dollars in tax.

Need to know

  • Your principal place of residence may be exempt from capital gains tax for up to six years after you first rent it out.
  • Moving back into the property and out again resets the six-year term for a rental.
  • When you’re living in one property while buying another, the ATO allows you to treat both as main residences for up to six months.

Peter LocandroPeter Locandro
is managing partner at Chan & Naylor Wheelers Hill, Melbourne and Moonee Ponds
www.chan-naylor.com.au;
phone 03 9888 3175;
peterl@chan-naylor.com.au

Have you got tax queries regarding your property investments and wealth creation strategies? Our experts are on hand to answer them.
If you would like your tax question answered in our magazine or on our website, please email your question to: editor.yipmag@keymedia.com.au

 

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