When you rent out an investment property, you are responsible for paying tax on capital gains if you sell the property. Whenever capital gains are greater than losses for an income year, you are responsible for capital gains tax (CGT). CGT is loosely defined as the tax that you are charged on any capital gains procured from an asset.
There are, however, a few little-known exemptions that the Australian Taxation Office (ATO) allows under special circumstances. While you are always responsible for capital gains on investment property, there are some circumstances in which you can rent your residence without incurring CGT.
The Rules: How It Works
Only your residence can be exempt from CGT. You are only allowed to declare one property as your dwelling and it has to actually be your main dwelling. You are not allowed to alternate between two different properties and pay no CGT on either.
If your home was purchased later than 20 August 1996 at 7:30pm, you must have lived in it when you first bought it or you will not be entitled to an exemption. If you rented the property straight away, the ATO considers you as having acquired the home as an investment property.
If you meet the conditions listed above and you rent the property for less than 6 years, you are exempt from CGT. If you have owned the property for more than a year and the ATO counts it as an investment property, you can claim a 50% discount.
In other words, the requirements for a full CGT exemption are the following:
the property must have served as your main residence from the day you bought it; if you move and subsequently rent the property, you can rent it for up to 6 years and enjoy your exemption. Reasons for moving include but are not limited to: relocating for employment, tending a sick relative and taking an extended holiday.
The more properties you own and the more you move, the more complex your tax situation. Always consult with a tax professional.
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