The 6 Years Rule Explained

Read to the end to get the best tip!

You’ve asked and asked and asked again; “Bel, what is the 6-year Capital Gains Tax Rule and how do I use it to reduce my payable tax obligation?". Actually, no, I’m lying; the question usually goes like this. “Bel, I hate Capital Gains Tax, I don’t want to pay it, explain it to me!!!”. Well, I’m about to lay it all out for you in this newsletter and everything you need to know. I'll be giving you my personal experience, the do’s and don’ts, and the rules you need to follow to understand the “6 Year Rule”.

Now, let me be clear, sometimes there isn’t anything you can do to avoid paying Capital Gains Tax (CGT) when it comes time to selling your investment property. Sorry to break it to you, but you just have to pay the tax unless you break the rules, and I definitely do not recommend doing that. But there are things you need to know to assist you with potentially minimising and reducing, even removing your obligation to pay the tax, all while following the rules.

So how do you “play by the rules”? By understanding the 6-year CGT exemption rule. Buckle up as we unpack this rule and empower you with insights that can supercharge your investment strategy!

CGT - The Basics – Property Edition

When you sell a property that has been an investment property at some stage and if you make a profit, that profit is subject to CGT. The year you sell and make the profit, the ATO classifies it as income and taxes you on that “income” - sort of like a little tax on the success of your investment. But fear not, there are exemptions, and one of the coolest ones is the 6-year CGT exemption rule.

Rule 1: Individuals Only

When delving into the nuances of Capital Gains Tax (CGT) on the property, it's crucial to note that the six-year exemption operates under individual names exclusively. Trusts or company structures are not eligible to access this particular exemption. This means that to leverage the benefits of the six-year primary residence exemption rule, the property must be held in the name of the individual seeking the exemption.

Rule 2: Defining Your Main Residence

Your main residence is your full-time pad. If you're thinking of renting it out, well, that's a different ball game – that's when it becomes an investment property. This is formally known as “Your Principal Place of Residence” (PPOR). Also, it should be noted that the 'main residence' only includes up to 2.5 hectares of land, and for anything over that, different rules apply.

ATO's Take on Main Residence

The Australian Taxation Office (ATO) uses several factors to determine your main residence. It's not just one thing but a mix of living there, having your stuff there, being on the electoral roll, and more. So if you are going to make a property your PPOR – do it legally and with proof and receipts because you know the ATO wants to see receipts.

Rule 3: You MUST live on the property first

When you first purchase your property, it must be considered as your PPOR. It can't be your “PPOR’ wink, wink… No, it legit needs to be your PPOR with receipts and proof. 6 months is the length of time the ATO likes to see you reside in your residence. This is a question for your accountant.

Rule 4: When the 6-Year CGT Exemption Rule Kicks In

So, let's get to the juicy part. If your property stops being your main residence, you can still claim it as such for up to six years. This is your golden ticket to minimizing CGT when you eventually sell. So, it was your PPOR (from settlement) and now you’ve moved out because you’ve had to move for work, upsizing, etc., understand that if you are.

Rule 5: You Cannot Have Two Main Residences

You can only nominate 1 property as your PPOR at any given time. Essentially, you cannot have your cake and eat it too. So technically yes, you can have 2 PPORs, but things get tricky. You can only designate one for CGT purposes and one as an exception to the rule. Your accountant can be your superhero in sorting this out when it's time to sell. BUT as I've always said, make sure you have proof and receipts of anything you are doing where tax and the ATO are concerned. You may need to provide information, so make sure you stay within the lines.

Rule 6: Get a CGT Valuation Every Time You Move Out

One crucial step is getting a CGT valuation done when you move out of a property classified as your PPOR. This valuation provides a snapshot of your property's value at the time of transition between PPOR and investment property and serves as a vital reference point for future tax calculations. By proactively obtaining a CGT valuation, you gain a strategic advantage – it helps you accurately assess your tax liabilities, plan for potential gains, and navigate the complex landscape of tax implications.

If you are certain you will be either selling or moving back to that property within 6 years, then I wouldn't bother, if you are unsure or know you won’t be moving back in, I’d highly advise you get the valuation done. However, getting one done early in the process gives you peace of mind AND yes, you can get a CGT valuation back-dated (but retrospective valuations cost more than current valuations)

As a valuer here is a tip, talk to your appointed valuer about valuing your property either a little higher or a little lower, depending on your situation (making sure that the valuation is within market parameters). A Good valuer will talk you through the process.

AND the last rule: Foreign Residents and the 6-Year Rule

If you are a foreign resident when a CGT event happens to your residential property in Australia (for example, you sell it), you aren't entitled to claim the main residence exemption.

Case Study: ME, here’s my own personal story

Imagine you buy a property, live in it, move out, rent it for a while, move back in, and then move out again. With the 6-year CGT exemption, you could potentially pay zero CGT on the sale. That's what I did, and here’s my own personal story; I purchased my first property in 2007 and lived in it for the first 6 months, so that we, my husband (then boyfriend) and I could claim the government first home owner's grant, etc… We moved out and rented the property, we moved back with our parents and save for a wedding (we got engaged shortly after). We moved back in 2009 after we got married (restarting the CGT clock because we moved back in within 6 years) and lived there till 2014 as our PPOR. In 2014, we once again made it an investment property and we moved to a bigger property that we bought. We eventually sold the home in 2017. Because we sold within 6 years of moving out, we did not pay any CGT, saving us close to $38k in CGT.

Navigating CGT can be a bit like wandering through a maze blindfolded, but fear not, equip yourself with a great accountant and property strategist to guide you through the financial wilderness. Remember, the 6-year CGT exemption is just one trick up your sleeve. There are more ways to minimise CGT, like remembering the date of purchase and getting savvy with your super fund – for this, you’ll need to chat with your accountant or Financial planner.

Happy investing!

Your Partner in Property Success,
Belinda, the Add Valuer

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