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

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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 readers -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.”

Here’s was my reply:

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.

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.

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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.

In Victor’s case, because he’s been renting the property out for three years, 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 month, 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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About

Ken is director of Metropole Wealth Advisory and gives strategic expert advice to property investors, professionals and business owners. He is in a unique position to blend his skills of accounting, wealth advisory, property investing, financial planning and small business. View his articles


'Capital Gains Tax When You Sell Your Home After It’s Been Rented Out' have 17 comments

    Avatar for Ken Raiss

    January 19, 2022 Lynn Christine Defoe

    A question. We have a jointly owned PPOR and are in the process of building another property. This property was registered in my husband’s name only as the initial intention was to use it as an investment property and as only he works this would maximise the tax claim.
    However we are now considering keeping it for personal use. Not claiming any tax benefit. The problem is that if we sell at some point in the future the CGT would presumably be borne entirely by my husband. Is there a legal/cost effective way of changing this so that if we do sell in the future the CGT laibility would be split between both myself and my husband.

    Reply

      January 19, 2022 Michael Yardney

      Please speak with your accountant, but you should be able to receive a gift of part of the property without tax implications

      Reply

    Avatar for Ken Raiss

    December 13, 2021 Jackie

    Hi Michael,
    I own 1/5th of an Investment property with family. I lived in it from the start as my PPR and rented out two of the three rooms at this time and continued for the next 20yrs. The two tenant’s and myself went thirds in the rent while I also paid towards the mortgage with family. Do I have to pay a portion of CGT ?. Thank you in advance.

    Reply

      December 13, 2021 Michael Yardney

      Clearly you had a minority share in this property, so therefore it complicates the situation. I think you should seek advice from your accountant

      Reply

    Avatar for Ken Raiss

    December 2, 2021 Tony

    We built an investment property 5 years ago and had tenants for 2 years and 6 months. We sold our other house and moved in to our investment property as our only residence in May 2019. If we sell this now, what Capital gains tax would we have to pay on it? We want to downsize for retirement.

    Reply

      December 3, 2021 Michael Yardney

      Tony, there is no doubt there will be a capital gains tax imposed on you – how much will depend upon the growth in the value of your property – as this is important for you please consult your accountant

      Reply

    Avatar for Ken Raiss

    October 14, 2021 Maria Haynes

    Hello, I bought my house in Florida Nov 26 1994 and placed it for rent in Nov 12, 1996 due to a work transfer to Guam. I am not in the military but work as civilian for the Navy and they transferred me several times overseas and in US for the 31 years that I worked with them. Now I am retired and decided to move back to Florida this year in March and move back into my house. My question, if I decided to sale in 2022, do I have to pay capital gains? How about If I sell in March 2023?

    Reply

      October 14, 2021 Michael Yardney

      Maria – this is an Australian website, and I’m Australian and therefore don’t know the tax laws in the USA. Sorry I can’t help you

      Reply

    Avatar for Ken Raiss

    June 3, 2021 Susan

    I have a query: my partner purchased a home in Qld with his mother. He has not lived in it but his mother has for over 10 years. He has not received any rental income but currently does not own his own home… is he liable for CGT when they sell? and if he was to purchase his own home at some stage in the future would that make a difference?

    Reply

      June 3, 2021 Michael Yardney

      Susan if his name is on the title and this is not been shown to be his principal place of residence, your partner will be subject to CGT even though he hasn’t received any rental income – that’s not a criteria for whether CGT is applicable

      Reply

    Avatar for Ken Raiss

    July 19, 2020 Kevin Robley

    I have a question on CGT. We purchased an investment property, use as a holiday let, we stopped this in 2009 and just used it as a holiday home, during this time we also had a PPOR. We sold the PPOR and moved into the holiday in March 2013 and have lived in it until now, we are now selling it will I have to pay some level CGT Even though it has beeN the
    PPOR for over 7 years. Thanks in advance

    Reply

    Avatar for Ken Raiss

    July 10, 2018 Margaret

    Hi just wondering if you can help About the year 2000 we had a business that was lost and we were bankrupted At the time my son bought house in Mornington and we are still in it We pay the mortgage and outgoings – my son is now married and in a home with his wife He has never claimed tax deductions for this property and I am wondering how we would go if we wanted to sell this to move into something smaller such as a unit Would there still be Capital Gains Tax involved Thank you

    Reply

      July 10, 2018 Michael Yardney

      Margaret – check with your accountant but for a cpaital gains tax exemption your son must have lived in the property as his Primary Place Of Residence yet it sounds like he has his own residence

      Reply

    Avatar for Ken Raiss

    February 22, 2015 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

    Reply

      February 22, 2015 Michael Yardney

      Shana
      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

      Reply

        Avatar for Ken Raiss

        September 20, 2016 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?

        Reply

    Avatar for Ken Raiss

    February 22, 2015 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.

    Reply


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