If you are thinking about renting out the property you live in, there are capital gains tax (CGT) implications to consider. When you live in a house and then sell, there is no capital gains tax under the main residence exemption. However, if you live in a property, rent it for some time and then sell, part of the profit will be subject to capital gains tax (only a partial main residence exemption is available).

Here is some useful information to consider in relation to CGT when renting out your house:

  1. Apportioning the capital gain – when the property is eventually sold, you are required to calculate the capital gain on the portion of time that the property was producing income. I.e if the property was owned for a total of 10 years: a home for 4 years and rented for 6 years, than capital gains tax applies to a period of 6/10 years. Please note that even if the property is vacant and not rented, capital gains tax still applies. You must actually be living in the property for it to be exempt from CGT under the main residence exemption.
  2. Obtain a written valuation of your property before you start renting – this can be used to reduce any capital gains on the sale of the property. As property generally increases in value, the current valuation is most likely to be significantly higher than the original price you paid for your house. Please note that the valuation can be from a real estate agent rather than a formal valuer but must be in writing. There is also no obligation to use the valuation, it is only an option if it produces a better tax outcome.
  3. The 6 year rule – there is a specific exemption from capital gains in the circumstances when: you live in a property, then rent it out for a period of under 6 years, then move back to live in the property and then sell. Under normal rules you would need to apportion the capital gain for the time that the property was rented. However, in this particular scenario only, no apportionment is required and capital gains tax doesn’t apply. Please note that you must move back into the property within 6 years for this rule to apply.
  4. Keep sufficient records – it is extremely important to keep good records when dealing with property. Please ensure you maintain sufficient paperwork to support the following:
  • Original purchase documents with details about purchase date, cost, additional costs associated with the purchase such as legal fees etc
  • Date when the property became available for rent
  • A valuation of the property when it became available for rent
  • Rental statements with income and expenses related to the property (including any additional invoices for expenses not dealt with by an agent)
  • Details of any costs relating to improvements to the property while it was rented (renovations, major repairs etc.)
  • Date when the property stopped being rented but not sold (if relevant)
  • Sale documents with details of sale date, price and any associated selling costs

Submitted by: Julia Katrich – Manager

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