Sometimes a situation may arise where you may want to move out of your main residence and live somewhere else while keeping the original property as an investment. This change in the way the dwelling is used may give rise to different tax consequences. Generally, a dwelling is no longer your main residence once you stop living in it. In some cases you can choose to treat a dwelling as your main residence for Capital Gains Tax purposes even after you move out of it. This is what is called the “temporary absence rule” or the “six year rule”.
How does the “Temporary Absence Rule” work?
Some of the basic factors for the “temporary absence rule” are as follows:
– For any period the dwelling is not used for income producing purposes after you cease living in it, you can treat the dwelling as your main residence indefinitely.
– For any period the dwelling is used for income producing purposes, you can treat the dwelling as your main residence for a maximum period of six years.
– If you are absent more than once, the six year period resets each time you move back into the dwelling and start using it as your main residence again.
– Where you make this choice, you cannot treat any other dwelling as your main residence for that period.
– You cannot cease to use a dwelling as your main residence if the dwelling was never used as your main residence in the first place.
David lives in his home that he bought in 2005 for the first two years. He then moved interstate for work purposes and rented his home to tenants for five years. Then he moved back and lived in it for another two years. His home was again rented out for three years before he sold it.
David can choose to treat the dwelling as his main residence for both periods of absence, even if the combined total of both periods is eight years. This is because the six year limitation is calculated separately for each period of absence and the rental period within each period of absence did not exceed six years. As a result, David was exempt from “Capital Gains Tax” (CGT).
What happens if you own more than one dwelling?
You can still choose to apply the six year rule to a dwelling that you have moved out of even if you move into another dwelling that you own. The main residence exemption can only be applied to one dwelling during the overlapping period.
The main residence exemption is very generous and should be maximised for the dwelling that is likely to generate the greatest capital gain when it is sold.
Please contact our office if you want to discuss more about the main residence exemption.