by Nick Allen

For Australian tax residents, any gain on the disposal of your main residence is protected from capital gains tax. Simply put, the profit you make on the sale of your home is generally tax free.

It is important to note that you can only have one main residence at a time, and certain events, such as moving house, or using your home to produce income can impact how this exemption is applied.

What is the 6-Year Rule?

You’ve likely heard of the 6-year exemption rule, but what does it mean, where does it apply, and why is it so good?

The 6-year rule can allow homeowners to rent out their main residence for up to six years after they move out of it, without losing the main residence exemption for capital gains tax (assuming they do NOT have a new property for which they wish to claim the main residence exemption). During this period, the property can still be considered the taxpayer’s main residence even though they are not living there.

Ordinarily, investment properties are taxed like other capital assets in Australia. That is, the taxpayer is taxed on the increase in property value over the period they owned it. For example, if a property was purchased for $600,000 and later sold for $1,000,000, the taxpayer would have a $400,000 capital gain to declare in their income tax return for the year. The main residence exemption excludes this gain from being included in the taxpayer’s taxable income, potentially saving tens of thousands of dollars in tax.

Applying the 6-year rule allows the taxpayer to rent out their home and not compromise this exemption. This is frequently utilised by people relocating for work or taking extended holidays. Situations where they do not wish to sell the property and would rather use it to generate income. Often, the rental income is used to pay for the upkeep of the property while the taxpayer is living elsewhere.

Recently, within the context of the current cost-of-living crisis, we have seen this strategy utilised by first homeowners. The homeowner will buy a house and establish their main residence in the property, then move in with parents, relatives, or a cheaper share house. This enables the taxpayer to enter the property market, then live in a lower-cost environment for a time while the new home generates income. In this scenario, the taxpayer is only assessed on the annual net rental income generated by the property. The capital gain upon eventual sale of the property is protected by the main residence exemption.

What is a “Main Residence”?

The ATO considers a property to be your main residence if:

  • You and your family live in it.
  • Your personal belongings are in it.
  • It is the address your mail is delivered to.
  • It is your address on the electoral roll.
  • Services such as gas and power are connected.

There is no set timeframe required by the ATO to live in a property for it to be considered your main residence. The above considerations are all tests of fact, however the ATO can also consider your intentions, or perceived intentions when purchasing and moving between properties in their determinations.

How We Can Help

Interpreting the ATO’s compliance requirements can be complicated and stressful. All cases are unique, and we encourage you to contact us to discuss your specific situation.

For advice on your circumstances, get in touch with us below or call 02 4969 6600.

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