Capital Gains Tax When You Sell Your Home After It’s Been Rented Out | Ken Raiss

What are the Capital Gains Tax implications when you move out of your home and rent it out and then sell it?

I love receiving questions from our listeners at Real Estate Talk – Victor sent in this one:

 “I moved out of my principal place of residence, which I’ve been in for seven years, and then rented it out for three years. 29117532 - piggy bank following money to a house isolated on a white background

I plan to sell it.

Do I have to pay capital gains tax? Do I need to move back in to sell it so I can get some exemption?

The main reason I want to sell it is to avoid capital gains tax and minimize my yearly land tax.

I plan to put some of the money into my self-funded superannuation fund so I can buy under that scheme.”

I referred these questions to Ken Raiss from Chan & Naylor on a recent Real Estate Talk show.

Here’s what he said:

Ken:  In summary, you can retain your main residence exemption for up to six years once you move out unless, of course, you’ve identified another property as your main residence.

Ken Raiss

You can only have one residence for tax exemption at a time.

The beauty of it is you don’t have to identify which residence until you sell one.

Then you do the numbers and you work out which property gives you the best tax advantage.

The ATO in this regard is pretty good at it.

To calculate the tax, what we need to do is go back and determine the market value of the property at the time you moved out.

That sets up the cost base to determine the profit on the sale.

You get the selling price less any costs, of course, and you compare it back to the market value on the date you moved out and rented the property.

That creates the profit that we then look at to see how much is taxable.  

The way we calculate what’s taxable is we look at the number of days you’ve owned it in total and you compare that to the number of days you had a tenant in there, while taking into account up to six years, you can have it as tax-free.

So it’s a proportion of the number of days you had a tenant versus the number of days you owned it, but you only multiply that against the profit based on the market value at the time you sold.

Kevin:  In Victor’s case, because he’s only been renting it out for three years, it’s not going to apply to him, is it?

Ken:  Correct, but there will be a small amount of tax involved.

There is still a 50% reduction on the tax because you’ve had that more than 12 months, and you actually can put part of that profit into super.

Super is taxed at 15% compared to Victor’s maybe higher marginal tax rate. save-money-house

But if you’re an employee, you can only put that money into super via a salary sacrifice, and the only way you can do a salary sacrifice is by advising your employer before you’ve earned the money.

You can’t call in on June 30th and say, “Last month’s money that I haven’t received yet, I want to salary sacrifice that.”

You have to salary sacrifice prior to earning the income.

If you’re self-employed, obviously that doesn’t come into the equation.

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'Capital Gains Tax When You Sell Your Home After It’s Been Rented Out | Ken Raiss' have 4 comments

  1. February 22, 2015 @ 9:22 am Hamish

    Thanks for clarifying this. However I am trying to uderstand why “Correct, but there will be a small amount of tax involved.” when the property was sold within 6 years of moving out.

    I also presume that while the tenant is in the property the interest on the mortgage is deductible. Could you please confirm this.


  2. February 22, 2015 @ 6:22 pm Shana Clift

    Appreciate the answer but can get lost in translation. Can you provide a table example ie years owned, rented, value of property when rented and how the tax due is calculated. Also details on where the person lived whilst the initial PPOR was rented (did they buy another home or rent) I am better with table examples
    Many thanks


    • February 22, 2015 @ 7:53 pm Michael Yardney

      We can on,y give big picture information here, rather than details when it comes to tax info, otherwise it could be construed as advice


      • September 20, 2016 @ 6:45 am Gregory

        Hi there, I would like to know more about Capital Gains Tax how it works when I do decide to sell my investment properties? Is it better to work to sell an investment property for Tax purposes or it doesn’t matter when you do decide to sell if your working or retired?


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