• Video transcript - Selling a rental property that was your home

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    Host

    Your main residence, your home, is usually exempt from capital gains tax, or CGT.

    In our previous video we talked about capital gains tax and how it applies when you sell your rental property.

    So what happens when you sell your rental property, but you lived in it as your home for some time? Do you still have to pay capital gains tax?

    Michael Lo

    When I bought my first rental property I rented it out for three years but later decided to move in and I lived there for one year. I recently sold it and made a profit of $100,000.

    Host

    So you don’t have to pay capital gains tax on a quarter of that amount, which is for the one year you lived there, out of the four you owned it.

    Michael Lo

    Yeah, it means I only have a profit, or capital gain, of $75,000 to consider but as I also held onto the property for longer than 12 months I take 50% off and I only have to pay tax on $37,500.

    Host

    Now let’s look at a situation if the house was Michael’s main residence first and then became a rental. And let’s say Michael chose not to use the ‘absence’ or 6 year rule, which we’ll explain in a minute.

    If you start renting out your home for the first time after 20 August 1996, a special rule affects the way you calculate your capital gain or loss. You take the property’s market value at the time when it’s first rented out as its cost.

    Let’s say Michael bought his home in 2006 for $400,000, and later started renting it out in 2010, when its value was $500,000.

    In this case, Michael wouldn’t use the purchase price of $400,000 as part of his costs. Instead, Michael would use the market value of the property when it was first rented out. That is – the $500,000 amount.

    Michael could have determined this at the time from local real estate agents or from a qualified valuer.

    When Michael sold the property in 2014 for $600,000 he deducted the market value of $500,000 – not the actual purchase price of $400,000 – to work out the capital gain.

    So Michael’s capital gain was $100,000 and here the 12 month period to be eligible for the 50% discount starts when the property is first rented out, so Michael was eligible and as he had no capital losses Michael would apply the 50% discount so the capital gain in his tax return would only be $50,000.

    As a general rule, your property is no longer your main residence once you stop living in it. However, if your property was genuinely your main residence prior to becoming a rental property, you can choose to continue to treat it as your main residence for capital gains tax purposes for up to six years after you stop living in it.

    This is known as the absence rule, continuing main residence rule or sometimes the six-year rule.

    So if Michael chose to use the absence rule the $100,000 capital gain would have been fully disregarded.

    But the catch is you can’t use the capital gains tax main residence exemption on any other property for the same period.

    If you’d like to find out more and to watch other videos in the series go to ato.gov.au/rental

      Last modified: 04 Mar 2015QC 40947