People move around a lot these days. So, it is very possible your main residence may become your rental property. Renting out a house that was once your main residence means you receive rent, can claim deductions and, when it is time to sell, you often won’t have to pay Capital Gains Tax (CGT). But there are a few requirements which must be met before you qualify.
The property must have been your main residence
To qualify for a full CGT exemption, the property must have been your main residence from when you acquired it. If you move out of the property and rent it out, you can continue to claim an exemption from CGT for up to six years after you move out. If you do not rent it out, you can claim a CGT exemption for it for an indefinite period after you move out.
Moving from your main residence could be for reasons such as:
• accepting a new job interstate or overseas
• staying with a sick relative long term, or
• going on an extended holiday.
Example: Full exemption – moved out and returned within 6 years.
Bill purchased his house in Brisbane in January 2000. He moved in immediately and after six months went on a working holiday around Australia for one year. While he was in Tasmania he met his future partner Maria and lived with her in her rented flat for five years. During this time his home in Brisbane was rented out and was producing income. He returned to Brisbane with Maria and moved back into his home. Several months later, he decided to sell his home. Bill did not own any other properties during this time and is able to treat his home as his main residence and be exempt from capital gains tax on the house as he moved back in within six years.
Renting for more than six years
If you rent out your home for more than six years, you may still be entitled to a partial exemption. The amount of the capital gain that is taxed depends on what proportion of your ownership period the home was neither your main residence nor covered by a six year period of absence which you can claim as exempt. If you owned the home for more than 12 months, you may also be eligible to reduce your capital gain by the 50% CGT discount.
Moving out of your home more than once
Your circumstances may change so, if you move back into your home after it has been rented out and subsequently move out again, a new six-year period commences from the time you last moved out. There is no limit to the number of times you can do this provided you do not nominate another home to be CGT exempt and each absence is less than six years.
Moving into your rental property
On the other hand you might buy a house, rent it out immediately, and then later stop renting it out and move in. In that case, you cannot treat the house as your main residence before you lived in it – no matter how long you live in it after you move in. The amount of the capital gain that is taxed depends on how long you rented it out.
As with any rental property, the costs you incur when your home is rented out, such as repairs and maintenance, are deductible even though you are claiming the main residence CGT exemption.
You need to keep accurate records and remember, you cannot claim:
• an immediate deduction for initial repairs, renovation or construction costs (although capital works deductions may be available over 25 or 40 years for certain construction expenditure), or
• any deductions for periods the home is not rented out or not available for rent.
Even if you intend to live in a property when you purchase it, it is important to keep all records relating to the purchase and the costs of owning the property – such as maintenance costs and interest on money borrowed to buy it. This is because, if your circumstances change, you may have to pay tax on some of the capital gain when you sell it.