Australia’s six year absence rule allows you to turn your primary place of residence (PPOR) into an investment property and collect rent and claim depreciation for up to six years provided you’ve stopped living there. When it comes time to sell you won’t be liable for capital gains tax or CGT for those six years.
What are the benefits of the six year CGT absence rule?
Mark Chapman, H&R Block’s director of tax communications, explains how would-be property investors can take advantage of the six year rule.
“If you own a property which is currently your main residence, you can move out of the property for up to six years and still get the full exemption from capital gains tax (CGT) - provided no other property becomes your main residence during the absence,” Mr Chapman says.
Collect rent and claim depreciation
As the home is now effectively an investment property, property owners can collect rent and also claim depreciation such as capital works or plant and equipment.
Continue the cycle indefinitely
“The six year rule resets each time you move back into the property and live in it as your main residence. That means that if you move back in and then later move out again, renting the property to tenants, you get a further six year absence period during which the main residence exemption is protected,” Mr Chapman says.
“If you rent the property out for, say, five years, then move back in for six months, then rent out the property again for another five years, your entire capital gain will be tax-free.
“In theory, that cycle can continue indefinitely until the property is finally disposed of.”
Buy other properties
“If you purchase another property whilst absent, you only need to make the choice as to which property to treat as your main residence on disposal of the first dwelling, not at the time of the absence,” Mr Chapman says.
“This gives you an opportunity to plan and to pick the property with the better tax outcome.”
Six year CGT Rule - How It Works
James buys his Adelaide PPOR in 2015 for $500,000. In 2017 he moves to Kalgoorlie for a job in the mines. While working in the mines he rents a home in Kalgoorlie.
He decides to rent out his Adelaide place, but keeps treating it as his PPOR for tax purposes. Three years later, he decides to sell the house. He sells it for $700,000 - a $200,000 gain.
His top marginal income tax bracket is 45c on the dollar, so without the six year rule, he would have been on the hook for $45,000 in capital gains tax - that’s with the CGT discount. It could have been $90,000 without the discount.
Thanks to the six year rule, James isn’t taxed a cent on this $200,000 profit.
Considerations to make with the six year CGT absence rule
While the benefits are obvious, the absence rule isn’t open season. There are a few things you’ll need to consider first.
Must have been a genuine PPOR
“The ‘absence’ concession can only apply if the house has actually already qualified as your main residence. So, if you buy a property and immediately start renting it out, you don’t qualify,” Mr Chapman says.
Must be genuinely empty
“You need to remember that the absence rule applies only where the property is genuinely empty, irrespective of whether the property is used to produce income,” Mr Chapman says.
“If you remain in the house but rent out part of it - say, on Airbnb - the absence rule doesn’t apply.”
Cannot treat another place as your PPOR
“It is possible to claim the main residence exemption whilst the property is vacant indefinitely – but you can’t own any other property for which you are claiming the main residence exemption at the same time and the property can’t be used to earn assessable income,” Mr Chapman says.
You can, however, treat another property as your main residence for up to six months if you are moving house.
Can get complicated
It gets tricky if you’ve used a portion of your home to generate income in the past.
For example, if you estimate 25% of your home - say one room - was used to produce income as a masseuse or some other at-home business, 25% will be subject to capital gains tax. If you made a $200,000 profit, 25% or $50,000 of that will get the CGT treatment.
If your situation is complicated, it’s highly advisable you speak to a tax adviser or accountant.
Why is the six year absence rule in place?
Mr Chapman says there are genuine reasons that necessitate moving out of a home and then treating it as an investment property.
“A homeowner may get a job abroad or interstate for a period of time and may choose to rent out their property whilst they are away, fully intending to move back in when their contract ends – it simply wouldn’t be fair not to apply the main residence exemption in such circumstances,” he says.
