The 6-year property rule is a significant aspect of Australia’s capital gains tax (CGT) system that can provide substantial tax relief to property owners. This guide will explore the rule in detail, explaining its benefits, requirements, and how it can be applied to your tax situation.
- Overview of the 6-Year Rule
The 6-year rule allows property owners to treat a property as their main residence for CGT purposes, even if they are not currently living in it, for up to six years. This exemption is particularly beneficial if you have moved out of your home and rented it out. Under this rule, if you sell the property within six years of moving out, you may not have to pay CGT on the sale.
- Eligibility for the 6-Year Rule
To be eligible for this exemption, several conditions must be met:
- The property must have been your main residence immediately before you rented it out or left it vacant.
- You must not have treated another property as your main residence during this period (exceptions apply if the second property is only treated as your main residence for a short overlap period).
- You must sell the property within six years of first renting it out or leaving it vacant to claim the full exemption.
- How the Rule Works
If you move back into the property after renting it out, the six-year period resets. This means that each time you re-establish the property as your main residence and then move out, a new six-year period commences from the date you last moved out. However, you can only claim the exemption for periods when the property is either your main residence or covered by the 6-year rule.
- Partial Exemptions
If you sell the property after more than six years of renting it out, you may still be eligible for a partial exemption. The capital gain that you must report is apportioned based on the number of days the property was not your main residence compared to the total period you owned it.
- Impact on Depreciation Claims
It’s important to note that if you have claimed depreciation on the property’s building or fixtures while it was rented out, these amounts may need to be added back to the property’s cost base, potentially increasing the capital gain when you sell the property.
- Record Keeping
Maintaining accurate records is crucial when applying the 6-year rule. You should keep detailed records of the dates you lived in the property, periods it was rented out, and any periods of vacancy. Additionally, keep all receipts and documents related to the property’s purchase, improvement, and maintenance, as these can affect the cost base and ultimately the capital gain calculation.
- Planning and Strategy
If you’re considering moving out of your home and renting it out, it’s wise to plan with the 6-year rule in mind. Consider how long you intend to rent out the property and whether you plan to sell it within the six-year period. Strategic use of this rule can significantly reduce your CGT liability.
- Consulting a Professional
Given the complexities of CGT and the 6-year rule, consulting with a tax professional or financial advisor is highly recommended. They can provide personalised advice based on your specific circumstances and help you navigate the rules to maximise your tax benefits.
- Examples of Applying the 6-Year Rule
Consider a scenario where you lived in a property for five years, then rented it out and sold it after four years. Since the property was sold within six years of being rented out, the entire period qualifies for the main residence exemption, and no CGT is payable.
In another scenario, if you rented out the property for eight years and then sold it, you would only get a partial exemption. The CGT would be calculated only for the two years beyond the six-year threshold.
Conclusion
The 6-year property rule offers a valuable opportunity for property owners to manage their tax liabilities effectively when circumstances change. By understanding and correctly applying this rule, you can potentially save a significant amount in capital gains tax, making it a crucial consideration for any property investment strategy. Always ensure you are compliant with the rules and seek professional advice to make the most of the tax benefits available to you. If you do not have a registered tax agent and require more specific advice relating to your circumstances, please [Contact Us Here].
