Welcome to today’s episode of the Rentvesting Podcast. Today is a supplementary episode to what we talked to Bianca about in the last episode.
She mentioned that she had an investment property in Sydney and was currently renting somewhere else. She was using something they call a 6-year exemption on capital gains tax. A lot of people don’t know what this exemption is or how you can claim on it.
Remember, this is general advice please don’t take the advice specifically towards your circumstances.
In general, your main or principal residence is exempt from any capital gains tax. This means that when you sell it, you don’t pay tax. If you have an investment property that you are renting and earning an income from, it has to be counted as an investment and you must pay tax on it. A property is defined as a principal residence if it’s your home that you live in.
To sum up capital gains, which we’ve gone through in the past, if you have any investment that gains value and you sell that investment, you have to pay tax at marginal tax rates minus the discount if you get it on the value that it has increased by.
The ATO has a classification/qualifying reasons for this. If you are currently living in your home and you move interstate, get a job overseas or have to go and stay with a sick relative; you can rent that primary residence, earn an income from it and not have to pay capital gains tax on it if you sell it. You can do that for 6 years as long as you don’t buy another property.
For example, if you go away on a 2-year contract overseas or interstate, you can keep your home, rent it out and earn an income. You can move back in after that 2 years and, as long as you don’t buy another property (as you are only allowed one primary residence at a time), you may not need to pay capital gains tax down the track when you do sell that property.
You can move in and out of the property in new 6 year periods; i.e. the period recommences each time you leave. There are no limits to how many times you can do this. The main rule around this is that you only have one primary residence. The only other rule is that the property that you are renting out must have originally been your primary residence when you acquired it. So you can’t have an investment property, rent it out and then move into it as a personal place of residence then move back out and try to claim that 6-year exemption.
There are a lot of rules around it and it’s a tricky area. This little episode today is to let you know about this strategy. Seek advice before you try and implement this. The worst thing you can do is muck it up, and remember that this is general advice only and may not be suitable for your individual situation.
The Rentvesting Podcast, available on iTunes, was created by Red & Co’s Jayden Vecchio and expert financial planner Louis Strange. Together, Jayden and Louis unpack the facts behind the property market, explain what’s really going on & where the market is heading. They believe in challenging the status quo and want to get out there to educate absolutely anyone looking to enter the property market.