Ask Margaret: How do I work out how much CGT I will pay on renting out my old home?

Hi Margaret,

I just read your recent reply on moving out of your home and the capital gain tax that may come with it.

Wonder if you could help me with this.

Just to clarify, if I stayed in my home for three years and if I sell it 10 years after moving out from it, and I have no other home, I would have to pay 4/13 of the net captital gain (method one)?

Can I get a valuation after the six years is up an calculate the gain from that date and pay tax on the difference (method two)?

I think the Australian Tax Office (ATO) website seems to deal with method one. Is method two also possible?  My six years is up in a years time and I am contemplating whether to sell since I live overseas.

Regards,

Shanthi

Hi Shanthi,

This part of the tax rules can be very confusing - and can be really hard to wrap your head around.  Where tax is concerned its really important that you contact an accountant, tell him or her your exact situation and tell him or her just how the rules apply to you, and what you will pay.

I have checked with Ian Rodrigues, my Property Success team member and tax specialist, and we talked your situation through.

You can choose to treat a property as your main residence even after you move out provided you do not choose another property as a main residence during that period and it is not rented.  This means that, if you didn’t own anything else, and you didn’t rent out this property, you can keep the main residence exemption on it indefinitely and pay no capital gains tax.

If it is rented out, however, the maximum period you can treat it as your main residence after you move out is six years.  You can move back in during the six years and the six year period will reset. If you continue to own the property after the six year period has expired,  you only get a partial exemption.

In your example, if you lived in it for three years, and then rented it for 10 years, you would have to pay capital gains tax on 4/13th of the gain.

You can't use a valuation after the six years for the basis of calculating the capital gain , but you are able to use a valuation at the date it ceased to be your main residence.  In your case, this was three years after you purchased it. The capital gain would  then be calculated as 4/10th of any gain over that market value.

You will need to get a qualified valuer to provide you that retrospective valuation if you don't have one from that time - the ATO is unlikely to accept a market opinion from a real estate agent where no valuing qualifications are held.

Again I stress that you should discuss this with an accountant who has a good grasp of capital gains tax and main residence exemptions.

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