All Topics / Help Needed! / CGT exempt rule – what happens if you move back in 2 months after the 6 years is up?

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  • Profile photo of sheranjsheranj
    Member
    @sheranj
    Join Date: 2009
    Post Count: 8

    Hi there, tax experts! I lived in my first home for 6 months, moved out and it has been rented since Jan 28 2006. I don't have any other property. The tenants gave us 2 months notice end Dec 2012 and are moving out tomorrow Feb 28. I'm moving straight back in. My tax accountant advised that I may not qualify for the CGT tax exemption anymore because I didn't move back in before 6 years were up.

    What are the implications if this is the case? That if I sell, I have to pay 50% of all profit made on the house as tax? I'm upset as I want to move in again for at least 6 months, renovate and sell it — but this could cost me $150k in tax.

    Help would be great — thanks.

    Profile photo of InvestorMickInvestorMick
    Participant
    @investormick
    Join Date: 2008
    Post Count: 55

    First thing is first, you will need to speak to your accountant for specifics but in reality I doubt you’ll be looking at paying $150k in tax. The way CGT works is that 50% of the CG will be exempt anyway as you’ve held it longer than 12months and the other 50% will simply be added to your income for the financial year it is sold and tax adjusted according to your tax threshold. Any tax losses you’ve had will be saved from the past 3 years if you had any and these will come off the final result of your income + capital gain.

    Unless you’ve made a fortune in CG it shouldn’t be that bad and if you have made a fortune in CG be happy and pay some tax! Remember, lots of so called investors are losing money all the time to save tax. If you have to pay some it is only because you’ve made more.
    Hope this helps!

    Profile photo of sheranjsheranj
    Member
    @sheranj
    Join Date: 2009
    Post Count: 8

    Thanks Mick! I have since been on the phone to the ATO and yes they explained the 50% discount for owning the place longer than a year.

    They also said that if it has been rented out longer than the 6 year exempt period, I'm still eligible for a partial exemption, meaning that when I sell I will pay CGT only on the proportion of profit that amount of time between the 6 year period ending and moving into it represents. Ie. if that month works out to be 1% of the time that I owned the property overall then 1% of the profit is subject to CGT — 0.5% when you apply the discount mentioned.

    And that's fair enough!

    Profile photo of IP FreelyIP Freely
    Member
    @ip-freely
    Join Date: 2008
    Post Count: 353

    I’d be checking that with your accountant – as far as I knew, if you missed your dates by 1 day, you blew your exemption from CGT – so if you are out of the house for more than six years, CGT would apply from the date you vacated not from 6 years to the time you moved back in (as you have interpreted). A $100 query to your accountant will save you $1000’s.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    See section 118-145 ITAA 1997

    This state you can still claim your property as your main residence, under certain conditions, even if you are absent for a period of up to 6 years. The actual wording under subsection 2 is "the maximum period that you can treat it as your main residence under this section while you use it for that purpose is 6 years." So this would mean, or I would interpret it to mean, that even if someone rented out a main residence for longer than 6 years the first 6 years could be CGT exempt under s118-145 (if all other conditions are met).

    ATO document Losses and CGT minutes, June 2010 supports this interpretation.
    http://www.ato.gov.au/taxprofessionals/content.aspx?menuid=43140&doc=/content/00260551.htm&page=14&H14

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of dachopperdachopper
    Member
    @dachopper
    Join Date: 2012
    Post Count: 21

    Agree with Terryw, the first 6 years of absence, it is still your PPOR, as long as you have no other PPOR claimed. Get a house valuation done at the 6 year mark, and you will only pay CGT on the difference between this and the sale price…. So really there is no benefit in selling before the 6 year mark as you get the same benifit but make more money if can afford to sell later.

    Profile photo of learning curve2learning curve2
    Member
    @learning-curve2
    Join Date: 2006
    Post Count: 36

    hi all
    what about any capital gains in the first 6mths when sheranj lived in the property? i read….

    Normally when a property is first used as a residence and then is rented, capital gains tax is payable if the eventual selling price exceeds its market value when it ceased being a residence.

    http://www.smh.com.au/money/on-the-money/how-to-qualify-for-the-cgt-main-residence-exemption-20101229-199zy.html

    Does this mean that any capital gains made in the time you bought the property to when you move out to rent it, it will be subject to CGT even though it was your PPOR?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    main residences are usualy cgt exempt so generally no cgt payable

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

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