Rental Property Becomes Main Residence
Let’s assume that Troy and Mary purchased an investment property on 1 July 2005 for $300,000 and rented the property from the day they purchased it (they had some great estate agents).
Troy and Mary then move into the rental property on 1 July 2021 and they sell the property , which is now their main residence, on 30 June 2022 for $500,000.
Troy and Mary would have had to have moved into their investment property ‘as soon as practicable’ for it to have been their main residence.
This means that even though it became their main residence when they moved into in 2021 it
was not their main residence from the time they purchased it.
Unfortunately for Troy and Mary the ‘absence’ provisions do not apply from the beginning and they will have to pay tax when they sell.
But how do they calculate the amount of the capital gain (or sometimes it’s not worth thinking about but a capital loss) ?
Troy and Mary are eligible for some relief. They are entitled to a partial exemption because they lived in the house.
As mentioned above Troy and Mary will have a capital gain of $200,000. The amount that Troy and Mary will need to consider tax purposes is calculated as
Amount of capital gain x Number of days rented out
Number of days owned
This equals
$200,000 x 5,843
6,208
The assessable capital gain is $188,241
This amount will be eligible for a discount called the general capital gains tax discount which is currently 50%.
This would reduce the assessable capital gain to $94,120.
This is the amount they would be taxed on.
The ATO site has some useful tools and videos to also assist.
CGT when selling your rental property | Australian Taxation Office (ato.gov.au)
Frequently Asked Questions
A rental property becomes your main residence when you cease to rent it out and start living in it. It becomes the dwelling you primarily reside in. It’s important to understand that the property only becomes your main residence from the time you move in, not from the time of purchase.
‘Absence’ provisions typically allow homeowners to treat a dwelling as their main residence even when they’re not living in it. However, these do not apply from the beginning of the property’s life if it started as a rental property. This means, in such cases, you will have to pay tax when you sell, even if you have lived in it as your main residence for a period of time.
The capital gain is calculated based on the selling price minus the purchasing price. However, you are eligible for a partial exemption because you lived in the house. This exemption is calculated by multiplying the capital gain with the number of days the property was rented out, divided by the number of days the property was owned.
The general capital gains tax discount is currently set at 50% for individuals in Australia. It’s a relief measure that reduces the taxable amount of a capital gain. In the case of a rental property that became a main residence, this discount is applied to the assessable capital gain.
The Australian Taxation Office website is a reliable resource. They provide useful tools, videos, and information to help you understand the tax implications and calculate potential capital gains tax obligations. You can find more information about capital gains tax when selling a rental property on their website.
