Investment properties are generally subject to capital gains tax (CGT), which is a tax on the profits you make on your investment when you sell.
Your CGT bill can be a substantial sum – sometimes, depending on the amount of capital growth, up to several hundred thousand dollars.
If the property is in your name, your CGT invoice is calculated at your individual tax rate. For example, if you earn $ 100,000 a year and pay a 37% tax, plus a 2% Medicare Levy, and your capital gain after rebate (see box p64) is $ 50,000, you'll add 50,000 $ to your income during the fiscal year the property is sold.
The six-year rule applies to your principal place of residence, which is generally exempt from any source of tax, only when it is in effect. act of property tax or capital gains tax
You would then pay the CGT at a rate of 39% (Medicare included), which would be $ 19,500.
The only property on which you do not have to pay the CGT is your main place of residence.
The good news for real estate investors is that there is also a specific rule that allows some homeowners to convert their own home into investment property by renting it, and avoid paying CGT on them. profits on sale. This is what is known as the six-year rule.
What is the six-year rule?
The Australian Taxation Office (ATO) explains that the six-year rule allows you to consider a dwelling as your principal residence for a period of up to six years after your departure, s & # 39; it is used to generate income. This means that you will not have to pay CGT if you sell the property within six years of your move.
"The six-year rule applies only to your principal place of residence, which is generally exempt from any source of taxation, that it is a question of the property tax or capital gains tax, "says Ed Chan of Chan & Naylor.
"Once you rent your house and get a tenant, you usually have to pay the capital gains tax – unless you go back within six years. Once you have moved, you get rid of your tax obligations on capital gains related to the property. You can move out again later and rent it, and as long as you are relocated to the property in the next six years, you are exempt from capital gains tax. "
In other words, you can enter and exit the property many times, and provided that the duration of your absence never exceeds six years, you will never have to pay CGT.
However, this rule has certain conditions.
First, you must first truly live in the property to be able to apply this rule. You can not claim an investment property as your PPOR if you have never actually occupied the property yourself.
Moreover, during the six year period, you are not allowed to consider another property as your official principal residence in the eyes of the ATO. If you rent or live with your family, then everything is ready, but if you buy another house to live in, you will have to decide which of the two properties to declare as your PPOR.
When is the CGT payable?
Although the CGT can be a costly burden, many investors forget that the payment of capital gains tax is not due until you have not filed your tax return for the year in which the property is sold. "If you sold your property in January, you will have to file a tax return after June 30. Your tax year ends in June, and depending on when you have to file your return individually – everyone is different – you may have to file your return before October 31, or it may not be due before February or March of the following year, "Chan explains.
"You will then have some time to pay the tax bill after the filing of the return.To know when to file a return, ask your accountant."
In summary, the six-year rule allows you to leave your home, live elsewhere (provided you do not own the property) and rent your old home, then sell it before the six-month period. years is up without having to pay the CGT. You can also reinstall and then rent the property for other periods, provided you do not rent it for more than six years at any given time.
Real estate investors should note that this rule was designed to help homeowners who really need to leave their homes; it was not designed as a tax evasion strategy for investors.
"The difference between tax planning and tax avoidance comes down largely to the intent," says the ATO.
"Once you rent your own house and get a tenant, you have to pay capital gains tax, unless you go back within six years" Ed Chan
"Tax planning organizes your … tax affairs in the most tax-efficient way, in accordance with the law. In contrast, tax evasion schemes involve the deliberate exploitation of the tax system. "
If in doubt about the specific tax obligations and deductions available to you as an investor, contact the ATO or your accountant.
