Tax Q&A: Can we use the six-year rule to reduce CGT for multiple properties?

10/01/2019

Question: We bought a home in 1987 and lived in it for 12 years. We then rented it out for 19 years and bought another property, which we moved into.

We now want to sell the first home and are wondering if we can use the six-year rule to reduce our CGT if we claim it as our main residence. We have owned this house for many years. Is it possible to only claim four years instead of six so that when we sell our other house we would only pay two years of CGT?

Also, would this mean that when we sell our second house we will not get the 50% discount? The original purchase price was $128,500 in 1987; in 1999, when we moved out and rented it, we had it valued at $220,000. We estimate the current value to be about $1,100,000.

Thanks, Helen

Answer: If your first property was your main residence just before you moved out and started renting the property, then you should be able to choose to continue treating it as your main residence under the absence rule in section 118-145 ITAA 1997. If your property was being rented out then the absence rule can only be applied to the first property for a maximum period of six years.

If you apply the absence rule to the first property, then this would expose the second property to CGT for that period

If you apply the absence rule to the first property, then this would expose the second property to CGT for that period. For example, if the absence rule is applied to your first property for six years, then the second property would be exposed to CGT for six years.

If the absence rule is applied to your first property for four years, then the second property would be exposed to CGT for four years. This assumes that the second property was acquired at around the same time that you moved out of the first property and started renting it out.

If you cannot apply a full main residence exemption to the sale of your first property, then you need to start by calculating the gross capital gain or loss, which involves determining the cost base of the property. While it would normally be determined with reference to the purchase price, you will need to see if the ‘home first used to produce income rule’ in section 118-192 ITAA 1997 applies.

You are considered as having reacquired the property for its market value at the time the property was first used to produce income if:

• you would only qualify for a partial exemption under the main residence rules for a CGT event happening in relation to a dwelling because the dwelling was used for the purpose of producing assessable income during the ownership period; and
• the property was first used to produce income after 7.30pm ACT time on 20 August 1996; and
• you would have qualified for a full exemption under the main residence rules if the CGT event had happened just before the first time it was used to produce assessable income

This should reset the cost base and acquisition date for the purpose of calculating the gross capital gain and applying the partial exemption rules.

The CGT discount should generally be available if the property does not qualify for a full main residence exemption and it has been held for more than 12 months. The discount would generally be 50%, but this could be lower if you have been a non-resident or temporary resident for some of the ownership period.

Need to know

- A rental property can be considered your main residence for six years.

- The absence rule can only be applied to one property at a time.

- The CGT discount may be lower than 50% if the homeowner was non- resident for part of the ownership period.

David Shaw

is CEO of WSC Group