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Understanding how the Capital Gains Tax (CGT) main residence exemption works when you move out and rent out your former home can help you make informed decisions about your property. Here’s a detailed look at how you can continue to treat your former home as your main residence for CGT purposes.
How It Works
Your main residence, or home, is generally exempt from CGT. Typically, a property ceases to be your main residence once you stop living in it. However, for CGT purposes, you can continue to treat a property as your main address under certain conditions:
- Up to 6 Years: If you use the property to produce income, such as renting it out, you can apply the ‘6-year rule’.
- Indefinitely: If you do not use the property to produce income, you can continue to treat it as your main address indefinitely.
During the period you treat the property as your main residence after moving out:
- It remains exempt from CGT, just as if you were still living there, even if you start renting it out.
- You cannot designate any other property as your main address, except for up to 6 months if you are in the process of moving house.
Eligibility Criteria
To qualify for the main residence exemption:
- The property must have been your main address first. You cannot apply the exemption to a period before the property became your main residence. For example, if you rented out the property before living in it, the exemption does not apply to that rental period.
- You must have stopped living in the property as your main address.
If the property was continuously your main address, the standard rules for the main residence exemption apply. This means if you use it to produce income, you will only be entitled to a partial exemption from CGT.
Foreign residents generally cannot claim the main residence exemption if a CGT event occurs, such as selling the property. For more details, see the main residence exemption for foreign residents.
Making the Choice
You choose to treat a property as your main residence in the income year a CGT event occurs, such as selling the property. This choice is made when preparing your tax return for the year the event happens, based on the contract sale date, not the settlement date.
If you own both the property you choose to treat as your main address and another property you actually live in, you make the choice in the income year you first sell one of those properties.
Former Home Not Used for Income
If you do not use your former home to produce income (e.g., you leave it vacant or use it as a holiday house), you can treat it as your main address for an unlimited period after you stop living in it. This only applies if you are not treating another property as your main residence simultaneously.
Example: Bill bought a unit and lived in it for 3 years. He then moved out to live with a friend while his son occupied the unit rent-free. Bill did not treat any other property as his main residence. Twelve years later, he sold the unit and claimed the main residence exemption from CGT.
Former Home Used for Income
If you rent out your former home or make it available for rent, you can choose to treat it as your main residence for up to 6 years after you stop living in it, known as the ‘6-year rule’. You can decide when to stop the period covered by your choice. For example, if you rented it out for 5 years, you could choose to treat the property as your main residence for 3 of those years.
If you are absent more than once while owning the property, the 6-year period applies to each period of absence. A period of absence ends when you either stop renting the home and move back in or leave it vacant.
By understanding these rules and making informed choices, you can effectively manage your property and take advantage of the CGT main residence exemption.
Learn more at the ATO.
