Capital Gains Tax
Capital Gains Tax will normally apply on the sale of investment properties. There are also circumstances where the capital gain may be exempt (Main Residence exemption) or apportioned (usually due to the Principle place of residence exemption or receipt from deceased estate).
Capital Gains can be a very complex topic so advice must be sought for individual circumstances. However, we can explain some basic principles of Capital Gains Tax relating to residential properties. With knowledge there is also planning opportunities if taxpayers know their circumstances are going to change.
The Temporary Absence Rule – Extending the Main Residence Exemption.
Where a dwelling ceases to be used as a taxpayer’s main residence, the taxpayer can chose to continue to treat the dwelling as their main residence for all or part of the period that they are not living in the property for a period of up to six years.
The six year exemption rule only applies for the period the property is the “Main Residence”. A taxpayer can still apply this rule if they acquire another property, even if they live in it. The catch is there is no “Main Residence” exemption attached to the second property which makes it subject to Capital Gains Tax (CGT).
Reduced Cost Base for Properties acquired after 13 May 1997 where Capital Works Write-off claimed.
7.30 pm on 13 May, 1997, was a critical time for CGT. For properties acquired after that time, the “Cost base” of the asset is reduced for capital works deductions claimed. An exclusion to this is deductions for capital works expenditure incurred after that date and prior to 30 June 1999, where the property was acquired prior to 7.30 pm on 13 May, 1997.
In brief, the amount claimed for capital works deductions are applied to reducing the cost base which makes the amount of capital gains higher and may result in a higher amount of Capital Gains Tax.
If you owned the property prior to 7.30 pm on 13 May, 1997 there is no adjustment to the cost base.
Main Residence used to Produce Income for the First Time after 20 August 1996
Where a taxpayer’s main residence is first used to produce income after 7.30 pm on 20 August 1996, the taxpayer is generally deemed to have acquired the property, for CGT purposes, at the market value at that time. This means for main residences converted to income producing after 20 August 1996, a capital gain or loss is calculated on the market value at time of conversion and the sale price when subsequently sold.
Valuation where status of residence changes from Main Residence to Income Producing.
As a final note on CGT, where usage of a property changes from Principle place of residence and rental, or vice-versa, taxpayers should obtain a valuation as at that date. A valuation from local Real Estate Agents should be sufficient, but a valuation from a licensed valuer is recommended.
Post by Guest Writer David Maynard – CEO of My Tax Zone
Filed Under: Tax Tips
About the Author: 
Hi
I had a property as my main place of residence since 1999, I moved out in 2005 and rented it until 2008, but I did not purchase another property until I sold this property in 2008. Am I able to apply the 6 year exemption rule for capital gains?
Your assistance is much appreciated.
Wayne
Hi Wayne
Thank you for your question.
As far as I am aware as long as you have not rented out your main residence for more than six years and it is Your Main Residence even though it was rented out, then you would fall under the six year rule for Capital Gains Tax.
For more information I would refer you to the following ATO Website.
http://www.ato.gov.au/individuals/content.asp?doc=/content/36887.htm
I hope that helps.
Best regards
Tracey
Hi,
We were told by our accountant that if we placed the earnings from the sale of our investment property, into a cash management fund for 12 months, that we would not have to pay any capital gains tax. Is this correct or not?
We are skeptical! What do you think?
Much appreciated
Anna
Hi Anna
Thank you for your question.
I have not heard of this before and I would like to check it out with some Accountants.
I will speak to a couple and then confirm this with you.
Best regards
Tracey
Hi Anna
I have spoken with Nathan from Morris Accounting and he confirmed that you can possibly do this.
It would not be your standard managed fund, there were a few available before the financial crisis.
If you would like to email Nathan he will be happy to go through your available options with you.
His email address is: nathan@morrisaccounting.com
Hope this helps.
Best regards
Tracey
Can you confirm, if I purchased a home in early 2000, but also rented a portion to help pay for expenses, is my home is still exempt under this rule? It is obviously my PPOR but also used to produce income – so I am confused!
Hi,
We have owned our house for 4 years and has been our PPOR in that time. We are building interstate and considering living in that house before renting it out. If you live in a investment property prior to renting it out do you avoid some or any capital gains tax for that property? how long would that have to be your PPOR?
Thanks for your help.
Great article, again. These informations are especially useful …
Thank you, I am pleased you found the article useful.
Best regards
Tracey Lunniss
Hi Justine
As far as I understand as long as you don’t claim deductions for the Interest/mortgage repayments, local council rates or depreciation then the rule still applies. At one stage I was running a home business and my accountant advised me not to claim any interest, rates or depreciation which was good as when we sold the property it had gone up in value and we did not have to worry about capital gains tax.
I hope this helps.
Best regards
Tracey
Hi Michelle
Thank you for your question.
When you move out from your PPOR and start to rent it out you will be entitled to a part exmeption of CGT, this being the time that you lived in the property. It is advisable to ensure that you undertake a property valuation on the property to ensure when you finally sell the property in x number of years you only pay capital gains tax on the increase of the property value from when you moved out (ie. from when the property became an investment property) and not from when you purchased the property.
As you will move into another PPOR the six year exemption rule will not apply to the first property.
I hope this helps.
Best regards
Tracey
We rent out a portion of our main residence, which we bought in 2006. I am only just discovering we should have had the residence valued when we began renting part of the space out. What occurs if we now sell, and it appears, we will have to pay capital gains on a % of the space? Do the ATO get to put a nominal value on the property at that time (Feb 2008), to compare with the eventual sale price? And as of next week our renter will be gone, does the time we’ve owned the property versus the time we used a portion of it for rental purposes, come into the calculation also for CGT?
Thanks!! Jodi
Hi I am just wondering we have built a house and have been living in it since Christmas. If we were to put it on the market before living in it for a year do we have to pay more capital gains tax, than say if we were living in it over a year? Thanks
My wife and I purchased a 10acre block of land in Nanango, Qld in March 2005. The property had a 6 x6 shed, 6 x 4 demandable, caravan, toilet & shower, kitchen, power and phone etc. It was not council approved “residential”. We sold the property in Jan 09 making a profit of $65000, which we have invested into the stock market. We had all intensions of building an investment property or making the cabins habitable to rent, spending every weekend and school holiday’s there making improvements, but my employment posted me interstate which squashed our plans. I understand that the Capital Gain will be split between me and my wife. Do you know of any clauses/rules/legislations that may assist us to reduce or dissolve our CGT Bill?
we purchased an off the plan property which is due to settle in a few months and we have decided to on sell it, as we are currently just about to start building our new home. We purchased the property for $350K and only had a 5% deposit paid and in just under a year its now worth 395k. do we still have to pay CGT as we havnt and wont settle on the property, or how can we avoid it.
We have heard there is a loop hole, to avoid the tax if we use it as a deposit for our new place. Is this true or what can we do.
Hi
We acquired an investment property in February 2005 and were earning rental income until August 2007 where we got married and used the property as a principal residence. We have just sold this property. Would we have to pay CGT?
We bought our investment property in Queensland in 2006 and are hoping to sell at the end of this year. However, we’ve heard that it is better, from a CGT perspective, to sell an investment property when one or both parties are no longer working. Is this true and, if so, how does that work? I will be retiring in December – when would be a good time to sell?
Hi,
I am currently living in my residential property ( first home) which I purchased in Aug 2008. I plan to sell this property within the next 6 months and would like to know the following:
• I plan to rent it during the next 6 months till I am able to sell it
• Does capital gains tax apply to this property if I plan to re-invest the funds in buying another residential property in the future?
• What is the time frame within which I should purchase my property to avoid paying capital gains tax on the sale of my first residential property.
My husband purchased a property on 07 August 2006 for $150,000. We lived in the property from the purchase date until 08 June 2007. We then privately rented it to a tenant from 08 June 2007 to 21 December 2007. On 04 October 2007 my name was added to the title of the property.
We moved back into the property from 21 December 2007 to 26 March 2008. We then purchased a second property on 18 February 2008. Our original property has been rented from 26 March 2008 & is still currently rented.
If we sell in the next month for around $270,000 would we have to pay CGT or be eligible to any discount?
What is the current % on capital gain for an investment home?
Hi
I have lived in my townhouse for approx 3 and half years and bought another unit which I use as an investment property. I have now moved in with my boyfriend and have rented out my first initial town house now as well. I know my investment property will have CGT but if I rent out my initial town house for 5 years could I sell the townhouse(main residence) after the 5 years with no CGT as I know that you can rent out your main residence for up to 6 years with no CGT but does no CGT still apply when you have another investment unit as well?
Thanks, your article is the most informative that I have found.
Hi
I am curious about reducing CGTax. If i e.g. buy a house for 400K, spend 200K on renovating the home – it being my principal place of residence and then sell the house after 12 m of living there for e.g $1,000,000 (a little bit unrealistic i know) . Am i correct in saying that i would only be taxed on $200,000 at my tax rate at the time? Your help would be greatly appreciated.
Kind Regards – James
I must say this forum has been very helpful, thanks to all who have provided thier assistance in regards to this somewhat trivial topic of PPOR vs. CGT.
I have the following two questions I am seeking the answers for (any help would be much appreciated)
As per the ITAA Section 118-145 as long as you live in a house and claim it as your PPOR, then move out and rent it etc.. you have to move in before 6 years to ensure you dont get hit with CGT. If you move in prior to the 6 years you can then move out once again and rent the property out and you are exempt for a further 6 years, this can continue as long as you like as long as you move back in within 6 years.
My questions are as follows;
1. How long do you have to move into the house for, it is not stipulated in the ITAA?
2. Is it possible to claim one property as a PPOR but live in another?
(If I get married and my partner’s property is declared as our PPOR but we live in my house)
3. If I get married we claim my partners property as our PPOR (as above, if possible), from when is my house (that we live in) subject to CGT? Since i bought it or from that point on once we make the declaration.
ITAA reference site-
http://law.ato.gov.au/atolaw/view.htm?locid=‘PAC/19970038/118-145′
I purchased an investment property in Nov 2001, rented it until March 2008 and then moved in after selling our main residence. After moving in we spent $60000 on capital improvements (new bathroom, kitchen etc). We have lived in the house for 20mths. If we now sell how will our capital gains be calculated and how will the capital improvements be taken into account.
A property that was not rented or occupied is in 4 names (i.e the title), the house was bought prior to 1999. If we all agree to sell this, then how is CGT calculated i.e profit divide by 4 then calculation based on each individuals income? or is it CGT on total profit divided by 4.
Also what if during the time that the property was owned, some individuals weren’t working and have started recently? won’t that affect what tax bracket they were on during the course of the investment?
Thanks!
Mr S
Hi
We have a property that was purchased in 1995 (for $150k) and was our principal place of residence until 2000. The house was not used for investment purposes and no tax deductions were claimed (We were claiming our other place as our principal place of residence). We are now looking to sell the property but have a large CGT liability.
I was interested in finding more out on how to reduce this CGT liability. Is there a way we can out it into a CMT like Anna said above?
Many Thanks – Meaghan
Another query for the mix.
I lived in my house (principal residence)for 10 years. I have sinced travelled for 4 years and rented out the house. I plan to return and live in the house again. I will have been away for about 5 years. My question is ; what period of time do I need to live in the house again before I can start another exemption period of 6 years. (as I expect to have to move interstate probably after 6 months)
Thanks
Brett
i just recently split with my girlfriend. during the time we were together we bought a block of land in queensland. we have decided that she would buy my part of the land. do i have to pay capital gains tax on this money.
Hi
I have just over 4 acres of land at Agnes Waters Qld.I have owned the land in excess of 14 years..Will I have to pay capital gains tax if I sell and how would that be rated?
There have been NO improvements on this property since purchase.
Regards
Rae
HI, My husband and I built an investment property last year, we currently have it rented out for 12 months then are looking at selling our PPOR and moving into the investment home. Can this then become our new PPOR and be exempt of capital gains or maybe a portion? Do we need to live in it for a certain amount of time to be exempt?
Hi,
I only have a town house and have been living here for 4 yrs. If I purchase a block of land in 2-3 months and build and complete my own house 1 yr from now. Then I move into the new house 1 yr from now and sell the old town house say 1.5 yrs from now. There will be about 1.5 yr between the time I buy the new house and when I move in.
Do I have to pay capital gain tax (CGT)on the old town house when I sell it in 1.5 yr time?
Do I get CGT exemption when I sell the 2nd new house in the future ( more than 10yrs)if I keep it as my principle resident?
Regards,
Eddie
Hi,
My brother and i purchased an investment property about 2.5 years ago and has been rented out the whole time. We have now decided to renovate and sell to make a nice profit, meaning we will be hit with CGT tax.
When the tenants move out which is in a couple of weeks, can i get a market evaulation from a real estate agent and therefore the cost base is obviously what we paid for it and the sale price wil be the market evaluation. We are going to renovate and live in it and make it our primary place of residence. To avoid such a heavty CG tax is it possible to use the market evalution as our disposal price???
If not what could be a strategy to pay minimal CG other than holding it for a longer period of time???
Thanks you.
Hi,
My wife and myself bought our first unit in May 2008 and lived in it for 8 months. We then moved out and started renting out our first home. We are currently renting and are looking to buy another property. If we buy a new residence in Sep 2010 and declare this as our main residence when will the CGT kick in for our investment property. Do we get a partial CGT exemption till the settlement date of our new home or do we have to pay CGT for the entire period from the day we moved out of the first home. Your advise will be much appreciated.
Thanks
Glen
Very good information , i will bookmark your blog right now
Hi,
I purchased an empty townhouse land in 2007. it was a 2 year settlement with the owner. 2009 September I signed a contract to build my house with an builder, i wasn’t happy with the work he was doing to my house, so i hired an inspector to write a report for me, anyway the house had many defectives in it. i spoke with the builder with my lawyer. The builder doesn’t want to go court, he turned around to me and said sell me you house and land, the house is nearly finished. if i do sell to him would i need to pay any tax on it.Your advise will be much appreciated.
Thanks
Ali
We bought a property at Sep 1998, we move out at Jan 2004, and rented out since Jun 2004. At the time I moved out, we did valuation was $300,000. We sold it Jul 2008.
My question here is, someone told for CGT for the property we sold, should be difference between sell value and the valuation value at the time we move out. Is that right? If so, do we still get 50% CGT as well.
I will be very appreciated.
Thanks,
Bin
Hi
I built a house late last year and now am looking at renting it out and moving in with my boyfriend.If we keep the house seperate.Will have to pay CGT or will. I am not really understanding how all this CGT works.
Thanks Jess
Hi
I meant to say will my boyfriend have to pay CGT or will i have to pay CGT.
Thanks
Jess