When can I treat my former home as my main residence for capital gains tax?

If you are selling a property that was once your home, you might be wondering whether you can still claim it as your main residence for capital gains tax (CGT) purposes. The good news – under certain conditions, you may still be allowed to treat your former home as your main residence for capital gains tax purposes, which could reduce or eliminate tax that might have otherwise been owed.

What is a “main residence”?

Your main residence is generally the place you and your family live, where your belongings are kept — essentially your home. It is usually exempt from capital gains tax when the property is sold provided certain conditions are met:

• You are an Australian resident for tax purposes.
• The property has been your home during the period you owned it, and
• It hasn’t been used to produce income (you didn’t rent it out and/or you didn’t run a business from it and claim occupancy costs).

The 6-year rule (the “absence” rule)

Complications can arise if you move out of your main residence and rent it out or leave it vacant. Fortunately, there is a concession to help property owners retain the CGT exemption on a former home for a period after they move out. This is the “6-year rule”.

How it works:

• If you move out and rent your former home, you can still choose to treat it as your main residence for capital gains tax purposes for up to 6 years from the date you moved out.
• If you sell within the 6-year window, the sale can be fully exempt from capital gains tax.

However, you can only treat one property as your main residence at a time. If you acquire or move into a new home and want to treat it as your main residence, you’ll have to choose which property to nominate for CGT exemption.

Example

John purchased a house in June 2009 and lived in it as his main residence.

In June 2013, John’s employer required him to move to remote location and he decided to rent out his home.

In June 2018 John sold his main residence.

John sold the property 5 years after moving out. As this is within 6 years of him renting out the property, he can continue to treat the property as his main residence for capital gains tax purposes and the sale will be fully exempt from CGT.

What if you go past 6 years?

If your former home is rented for longer than 6 years, the property may be assessable for capital gains tax for the period after the first 6 years. The taxable gain is calculated based on the period after the initial 6 years of absence, starting from when the property was first rented out.

When calculating the capital gain, the property’s market value at the time it was first rented is used as the cost base for the calculation.

What if your former home was never used to produce income.

If your former home has never been used to produce income you can continue to treat the property as your main residence indefinitely. That is provided you are not treating another property as your main residence at the same time of ownership.

Every situation is unique and can be complex. If you are thinking about selling your former home and are unsure if the sale will be subject to capital gains tax, speak to your accountant to understand what capital gains tax may apply.