Main Residence Exemption – The Burden of Truth
I would expect that the majority of property owners and investors have heard something about the “six year main residence exemption for Capital Gains Tax purposes”. If not, here is a brief rundown:
If you own a property which you live in for a period of time as your “main residence”, then you rent the property, but go on to sell the property within six years of moving out, you can claim the Main Residence Exemption – meaning that you will not have to pay capital gains tax!
This Exemption is most commonly used when people upgrade the family home, but keep the old home and rent it out. It can turn out to be an excellent tax effective strategy to sell the original home just before the six years in up, resulting in no CGT being payable.
Don’t get too excited, there is strict criteria to be met!
There are a number of very important issues to be aware of if you are planning on using this strategy.
Firstly, we need to look at the period of time you have lived in the property. For existing properties, the ATO legislation does not currently state how long you need to have lived in the property to be able to apply the exemption. If you only reside in the property for a short period of time, you will need to be able to show that you moved out for valid reason such as a new job interstate…and not just back in with our parents so you can claim the exemption!
Proof that you actually lived in the property for that period may be required. This can be shown by:
- Evidence the rest of your family lived there, such as school fees;
- Using the property as your mailing address;
- Having the utilities connected in your name at that address;
- Being enrolled to vote at that address;
- Having your drivers licence address as that address;
- Whether you have all of your personal possessions there.
Another important point to consider is that while Capital Gains Tax is calculated from contract date to contract date, the “six years” used for the main residence exemption is calculated to settlement date – so don’t get caught out with a settlement date more than six years from the date you moved out.
You also need to be aware that you can only apply the exemption to one property at any given time. If you have upgraded the family home and are now selling the old one intending to claim the exemption, the new property will be subject to CGT for the period you have claimed the exemption on the old property. As an example, if you purchased your new property five years ago and sell it in five years then CGT will apply to half your gain even though you have always lived in the property. Most people prefer the immediate tax savings from claiming the exemption, however, you do have the choice whether to apply the exemption, or not.
In addition, it is possible to move back into the property. For example: after moving out of the property, you move back in after 5 years, live there for another two years and then move back out – this will reset your exemption for another six years. Of course all the same rules apply second time around so ensure you have valid reasons other than avoiding CGT for moving back in and out of your property and can prove you lived in the property for the amount of time you claim.
Lastly, the ATO have made incredible advances in their technology over the years and their data matching is no exception. As soon as you sell the property, the State Revenue Office sends the details to the ATO, the ATO then look up your previous returns and see that you have declared rental income but no capital gain – this may just be the red flag that puts you into the ATO Audit basket!
There is no doubt that you may be entitled to a legitimately claim the CGT Exemption, HOWEVER, you will need to have proof that you lived in the property and had legitimate reasons surrounding you vacating the property, other than avoiding CGT! If you think this could be relevant to your situation please send me an email or give me or give me a buzz #03 8393 1000, I am happy to help.
Rebecca Mackie, Partner, Paris Financial
Image courtesy of hyena reality at FreeDigitalPhotos.net