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Q&A - capital gains tax

Q. In your Money Weekly column on Yahoo!7 Finance, you wrote: “Some might say, but hang on isn't there capital gains tax to pay? The answer is yes, but if the investor did not own a house, they could move in to the property only for a short time, and under the tax rules, the capital gains tax meter would go back to zero. The vital time period is six years.”

Can you please explain more about the above and the vital time of six years?
Alison, Montmorency, VIC

A. Capital gains tax is a very challenging tax area and I would always recommend you seek the advice of a good accountant when completing your tax return to ensure you apply the rules correctly.

I will try and shed some light on the six-year rule for you. This rule relates to someone who has owned the property they have been living in and as a result the property has been exempt from capital gains tax. The usual scenario is you buy a home, you move in and live there and then you may be posted overseas to work and plan to rent the property out until you return. An interesting twist here is that if you do not rent the property, the property will retain the exemption from capital gains tax forever.

So the tax office has recognised it would be unfair to penalise you for moving out if you have to go overseas to work. They allow you to rent the property for up to six years before the property will be subject to capital gains tax.

This rule does not actually stop capital gains tax. As you were already living in the property, the capital gains clock never started. If you believe you may never live in the property again, you should consider having the property valued at the time you move out to establish a cost base so you know where you stand. This valuation would then be the cost base for calculation of capital gains tax if you did not sell the property before the six years are up.

One rule to remember is you cannot have two main residences at the one time. So if you move to another property that you also own, you will need to decide which one you will classify as your own property to which the capital gains tax exemption applies.

To continue my example further, if after five years your contract for overseas deployment ceases and you move back to work in Australia and return to your property, it will continue to be exempt from capital gains tax. If you then seek work interstate or overseas and move out again, the six-year rule will apply to this new period of absence and you can hold the property for another six years before having to worry about capital gains tax.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Wednesday, July 22, 2009

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