The 6 year capital gains tax exemption (CGT) | Could save you thousands

When I find little nuggets of information that I know can help people now in the future I always love sharing them. I came across this little find of the 6 year capital gains tax exemption rule on our property purely by accident. In the hunt to understand how much equity I would have in my current house that we have as an investment property, I discovered that we were eligible to be exempt from this property tax.

Now don’t get too excited yet, this CGT exemption only applies to people who initially lived in their home. Or in other words, if you have the ability to live in your property before turning it into an investment property, it will most likely be the best decision you ever make to save on capital gains tax. Now thankfully for my family, this was something that happened accidentally.

So what is this 6-year exemption rule from capital gains on your property?

Simply stated if you lived in your property for 12 months prior to switching it to an investment property to earn income from you can continue to claim it as your primary residence alleviating any capital gains tax that may apply to the growth in your property value.

The main thing to keep in mind is that throughout this period you do not claim another property that you own as your primary residence for tax purposes. To give you greater clarity I’ll give you my own experience as a scenario on how it works.

My CGT exemption scenario

In 2010 my wife and I bought our first property together. In this instance, my wife missed her opportunity to cash in on the first home buyers grant as I had bought a property some 8 years prior with my brother. Our purchase of the Seaford property was meant to be our ‘forever’ house but alas nothing end up as forever, especially in our case.

After a few year and several circumstances changing in our life we decided that we would need to move to another property to suit our requirements. At the time we were not in a financial position to buy something else so we decided to move to the world now known as rentvesting (own an investment property, rent where you want to live). Over the next 4 years, this has seen us live in another rental property but we have never bought another property.

Now that our life circumstances have changed, we can comfortably buy a house that we want to now own and live in.

Here is the kicker, because we lived in the house prior to turning into an income generating asset, we now receive a 6 year time limit to how long we can continue claiming that property as our primary residence (for tax purposes) and be capital gains exempt.

What does this mean for us?

Well on the approximate $300k increase in house price since 2010 we do not have to pay the hefty CGT saving us around $40k based on the sharing of gains to our individual incomes and being taxed accordingly. Which is crazy right?

 


Information Sources:

ATO – Treating a dwelling as your main residence after you move out

Your Investment Mag – Six-Year CGT Rule, Tax On Non-Residents And CGT When Selling A Previously Rented PPOR

RentVesting – The Six Year Main Residence Exemption

Nexia – Turning your main residence into an investment

 

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