Your questions answered by an industry expert
Do I need to pay Capital Gains Tax?
I have been renting out a house that I used to live in and now I want to sell it and some people say I will be up for capital gains tax. I have heard about a six year rule but I have owned the house for seven years and rented it out for five of those years. What is my position? Jack, Tugen, QLD.
Believe it or not but the tax office website is great for this curly question. The ATO says renting out a house that was your main residence means you get rent, can claim deductions and, when it comes to selling it, you often won't have to pay capital gains tax (CGT).
But there are rules:
- The property must have been your main residence and for a full CGT exemption it must have been your main residence from when you acquired it.
- If you move out of the property and rent it out, you can continue to claim an exemption from CGT for up to six years after you move out.
- If you do not rent it out, you can claim a CGT exemption for it for an indefinite period after you move out.
The ATO provides a great example and here it is:
Bill purchased his house in Brisbane in January 2000. He moved in immediately and after six months went on a working holiday around Australia for one year.
While he was in Tasmania he met his future partner Maria and lived with her in her rented flat for five years. During this time his home in Brisbane was rented out and was producing income. He returned to Brisbane with Maria and moved back into his home. Several months later, he decided to sell his home. Bill did not own any other properties during this time and is able to treat his home as his main residence and be exempt from capital gains tax on the house as he moved back in within six years.
But wait there's more!
If you rent out your home for more than six years, you may still be entitled to a partial exemption. The amount of the capital gain that is taxed depends on what proportion of your ownership period the home was neither your main residence, nor covered by a six year period of absence which you can claim as exempt. If you owned the home for more than 12 months, you may also be eligible to reduce your capital gain by the 50% CGT discount.
The Guide to capital gains tax contains information to help you work out a part exemption.
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