17 Jan Tax Q&A: Can I Claim CGT Exemption For 6 Years Out Of 12?
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Q: We bought a house in October 2004 to live in, then moved out and rented it out from January 2007. We then sold it in June 2016. We have not bought another house since we moved out, and we have been renting instead. How does the six-year exemption rule apply here? Can we claim an exemption for the six years out of the 12 years and, if so, when does it apply/not apply?
A: The tax law provides that the sale of a family home is free from capital gains tax if certain conditions are satisfied.
Generally these conditions include:
• you own the house
• you have lived in the house as your main residence for the entire period you owned the house
• you have not elected to treat another house as your main residence during this time
If you have not lived in the house as your main residence for the entire period of ownership, a portion of the gain in value may be subject to capital gains tax.
A house can still be considered to be your main residence for a period of up to six years after you move out and rent the property, provided that you don’t treat another house as your main residence during this time (the six-year rule).
In your case, any gain in value of the house from the date you acquired it (October 2004) to the date you moved out (January 2007) will be free from capital gains tax. You should obtain a valuation of the property as at January 2007 in order to confirm this amount.
“A house can be considered your main residence for up to six years after you move out and rent the property”
Any gain in value from the day you rented the house (January 2007) to the date of sale (June 2016) will potentially be subject to capital gains tax.
However, you can choose to apply the six-year rule to extend the period of time the house is considered to be your main residence and potentially reduce the amount of the gain that will be taxed. If you apply the six-year rule then the house will be considered to be your main residence up until January 2013.
As you have rented out the house for more than six years, capital gains tax will be payable in respect of the days that the house was not considered to be your main residence (ie from January 2013 to June 2016).
The amount of the gain that is subject to tax is calculated by multiplying the gain realised since January 2007 by the proportion of days that the property was not considered to
be your main residence (ie capital gains tax would be $400,000 would need to be prorated for 3.5 of the 9.5 years (approximately $147,000).
Finally, you should also be able to discount the taxable capital gain by 50%, given that you have held the property for more than 12 months.
Special rules may apply if you have inherited the home or if you are not a resident of Australia for tax purposes.