How the CGT main residence exemption and 6-year rule apply when you move out, and how to include it in your tax return.

How it works

Your main residence (your home) is generally exempt from capital gains tax (CGT).

Usually, a property stops being your main residence when you stop living in it. However, for CGT purposes you can continue treating a property as your main residence:

• for up to 6 years if you used it to produce income, such as rent (sometimes called the ‘6-year rule’)
• indefinitely if you didn’t use it to produce income.

During the time that you treat the property as your main residence after you stop living in it:

• It continues to be exempt from CGT (the same as if you were still living in it, even if you start renting it out after you leave).
• You can’t treat any other property as your main residence (except for up to 6 months if you are moving house).

Eligibility

If the property was continuously your main residence, the usual rules for the main residence exemption apply. The property must have:

• been your main residence first – you can’t apply the main residence exemption to a period before a property first becomes your main residence (for example, if you rented out your home before you lived in it)
• stopped being your actual main residence and not used for income – that is, you stopped living in it.

Partial main residence exemption

If you use the property to produce income, you may be entitled to a partial main residence exemption from CGT. Examples include when you:

• run a business
• rent the property out (and the main residence exemption doesn’t apply to the period you rent out your home)
• ‘flip’ the property (buy it to renovate and sell at a profit).

Former home not used for income

If you don’t use your former home to produce income (for example, you leave it vacant or use it as your holiday house) you can treat it as your main residence for an unlimited period after you stop living in it. This only applies if you aren’t treating another property at the same time as your main residence.

Former home used for income

If you use your former home to produce income (for example, you rent it out or make it available for rent), you can choose to treat it as your main residence for up to 6 years after you stop living in it. This is sometimes called the ‘6-year rule’.

You can choose when to stop the period covered by your choice. For example, if you rented it out for 5 years, you can choose to treat the property as your main residence for 3 years.

If you’re absent more than once when owning the property, the 6-year period applies to each period of absence. A period of absence stops when you either stop renting your home and:

• move back in
• leave it vacant.

What happens if the 6-year limit is exceeded

If you use your former home to produce income for more than 6 years in one absence, it is subject to CGT for the period after the 6-year limit.

To work out your CGT when you dispose of your home:

• you need to work out your cost base, which is the market value of your home at the time you first used it to produce income, plus any allowable costs since then (this is the home first used to produce income rule)
• your capital gain or loss is based on the portion of time after first using your home to produce income; that is, over the 6-year limit.

Former home used for income before you move out

If you use any part of your home to produce income before you stop living in it, you can’t apply the continuing main residence exemption to that part.

This means you can’t get the main residence exemption for that part of your home either before or after you stop living in it.

Foreign residents

If you are a foreign resident when a CGT event happens to your residential property in Australia (for example, you sell it), you generally aren’t entitled to claim the main residence exemption.

Completing your tax return

If you signed a sale contract during the income year, you can choose to use the 6-year rule to treat the property as your main residence. When you prepare your tax return, include the main residence exemption if you decide to make this choice.

When you sell a property that you rented out, it’s important to include:

• if you elect to use the main residence exemption or not
• your capital gain or loss.

You must report the capital gain, loss or exemption in the same year as the date you signed the sale contract. Remember, this is based on the contract date, not the settlement date.

If you have any questions, feel free to ask them in the comment section. We will be happy to answer all your queries.