Ask Margaret: How can I avoid CGT if my first home is an investment property?

Hi Margaret,

I was reading one of your articles.

I'm wondering: Say I purchase my first property but don't live there. Instead, I rent it out for income. Say 10 years later, when I sell this property, how do I avoid paying Capital Gains Tax (CGT) - assuming this is my only property in the next 10 years?

What would happen if I make deduction on the interest of the loan, or do not making any deduction at all? Is the latter legal, from the ATO's point of view?

Thanks.
Wesley

To read Margaret's answer, click below.

When you own, and occupy, a home of your own, you may claim a 'principal place of residence' exemption on that property.

This means that, when you sell the property, you will not pay any capital gains tax on any gain you have made.

Further, if you move out of your principal place of residence (PPOR), you may rent it out, and claim any related tax deductions, for a period of up to six years and, as long as you either move back in, or sell it, before those six years are up you also will not pay any CGT. The only catch is that, during this 6 years you cannot own another property on which you would like to claim the exemption – you can only claim one exemption at a time.

The operative word here is 'own and occupy'. If you buy a property and you do not move into it as soon as it settles, then the property is not considered to be your principal place of residence until such times as you do move in, regardless of whether it is the only property you own, or not.

While you can move in at any stage and make it your PPOR, thus invoking a potential six year rule exemption at a future date when you move out, the fact that you did not live there from the moment you owned it changes a few things. You have to keep all of your records accurately on everything you spend, and then when the time comes to sell, your CGT liability must be worked out proportionately for days rented/days not rented.

Your cost base would be the cost base as at the date you bought it and then the gain is apportioned after the six year period is accounted for.

This can easily be overcome, as long as, when you buy the property, your intention is to live there and you move in when you settle, thus establishing the property as your PPOR. 

If, at a later date, your plans change and you move out, the six year period can commence, and your cost base for CGT would be the value as at the date the 6 years expire, if you don't move back in.  You can reset a new 6 year period at the end of the first by moving back in for a time.

Note that the tax office does not prescribe how long you have to stay there on either occasion – it just has to be your intention to live there and you must move in.