The six-year rule is actually an extension of the main residence exemption for property owners in Australia. Under this rule, you can move out of your home but still can claim the Capital Gains Tax (CGT) exemption for up to six years.
For many people, property is not just a home, but it is a long-term investment in Australia. When the property rates rise, it can create a good time to sell the property. But, it will also bring you under the Capital Gains Tax (CGT) as the selling price of the property is more than the buying price. So, the gap between amounts or the profit falls under CGT liability, which can reduce your returns.
Fortunately, the Australian Taxation Office (ATO) provides exemptions to reduce or even eliminate CGT in certain circumstances. One of the most popular terms related to exemption you might hear is the capital gains tax 6-year rule. In this article, we will guide you on what is the 6 year exemption rule for property investment in Australia.
What is the Capital Gains Tax 6 Year Rule
The 6-year rule is also known as the six-year absence rule. It allows you to treat your former home as your main residence for up to six years. It applies even if you rented out the home as an investment in Australia. But to qualify for this rule, you must own the home before you leave.
In case you sell the property within the six-year exemption period, you can claim a full main residence exemption from CGT. This only applies when you have no other property as your main residence during that time.
Good news, the 6-year rule also reset, when you move back into your home, in this case, a new, fresh six-year period starts after you move out again. You can use this rule multiple times as long as you move back into the property before starting a new absence period. If the property is left vacant and not producing income, the exemption period is unlimited, though you miss out on rental income.
When Your Property is Considered Your Principal Place Of Residence
The Australian Tax Office (ATO) 6 rule exemptions consider your property as your main residence. Let’s find out which factors your property is considered a main residence during the ATO review.
- Personal possession: You and your family live at the property and keep personal possession there even after moving out for some reason.
- Main mailing address: Your principal residence should be your main residential mailing address.
- Electoral bill: All your electoral bills should be enrolled at your main residence address.
- Usual utilities: Your property has all the usual utilities connected in your name.
On completion of the above criterias the ATO reviews your situation to make a qualified decision for a 6 rule exemption when you rent a home in Australia.
Limitations on Capital Gains Tax 6 Year Rule
While the 6-year rule is best for investors in Australia, here are some exemptions that you should understand:
- Only one main residence at a time – You can only claim the CGT 6-year exemption on one property. If you own more than one home, you must choose which one to nominate as your principal residence.
- Exceeding six years – If you rent the principal residence for more than six years without moving back in, then you need to pay CGT for the excess period.
- Home office – If you use a part of your home for business then that portion is not exempted from the 6 year absence rule.
Closing Words
Now, you know what a 6-year exemption rule for investment property in Australia is, so make use of it when moving out of home and renting it out. For people new to property investing and wondering about what is the right decision for renting a property in Australia, you can meet real estate experts in our online community: Property Buyers Australia.
FAQs
Does the 6-year CGT exemption apply to your main residence?
The 6-year CGT exemption applies to your main residence when you move out and start renting it. If you sell the property within that six-year period, you may qualify for a full Capital Gains Tax (CGT) exemption, but you should not nominate another property in Australia as your main residence during the same time.
Does the 6-year CGT rule apply to investment properties?
Yes. The ATO’s six-year CGT exemption rule applies to investment and rental properties.
What happens if I rent my property for more than six years?
If you rent your property for more than six years without moving back in, then you need to pay CGT for the period beyond six years.
Can I claim the rule on two properties at once?
No. You can only nominate one main residence for CGT exemption purposes at a time.
