Understanding the Investment Property 6-Year Rule for Capital Gains Tax

When it comes to investing in property, understanding the tax implications is crucial. One important rule to be aware of is the investment property 6-year rule for capital gains tax (CGT). This rule can have a significant impact on the amount of tax you owe when selling an investment property. In this article, we'll take a closer look at the 6-year rule, how it works, and how it can help you save money.

What is Capital Gains Tax (CGT)?

Before diving into the 6-year rule, let's first understand what capital gains tax is. CGT is a tax on the profit made from the sale of an asset, such as property or shares. When you sell an investment property, you may be subject to CGT on the capital gain, which is the difference between the sale price and the original purchase price.

How Does the Investment Property 6-Year Rule Work?

The investment property 6-year rule allows individuals to treat a property as their main residence for CGT purposes, even if they are not living in it, for up to 6 years. This means that if you own an investment property and later decide to move into it as your primary residence, you can still claim the main residence exemption for the time it was used as an investment property.

For example, let's say you purchased an investment property and rented it out for 4 years. After 4 years, you decide to move into the property and make it your main residence. If you then sell the property after living in it for 2 more years, you can claim the main residence exemption for a total of 6 years. This means that you won't have to pay CGT on the capital gain for the 6-year period.

When Do You Pay Capital Gains Tax on Investment Property?

While the 6-year rule can provide tax benefits, it's important to understand when you may still be liable to pay CGT on an investment property. Here are a few scenarios where CGT may still apply:

• If you own an investment property for less than 6 years and sell it, CGT will apply to the capital gain.
• If you own an investment property for more than 6 years but live in it as your main residence for less than 6 years, CGT may apply for the period it was used as an investment property.
• If you own multiple properties and don't meet the criteria for the main residence exemption for any of them, CGT will apply to the capital gains when selling.

How to Reduce Your Capital Gains Tax

While the investment property 6-year rule can help reduce your CGT, there are other strategies you can employ to further minimize your tax liability. Here are a few tips:

• Keep track of any expenses related to the purchase, improvement, and sale of the property. These expenses can be added to the cost base, reducing the capital gain.
• Consider obtaining a Capital Gains Reduction Report from a qualified quantity surveyor. This report can help identify and calculate any depreciable assets in the property, further reducing the capital gain.
• Explore other CGT exemptions or discounts that may be available to you, such as the 2-in-5-year rule, which allows you to treat a property as your main residence for CGT purposes if you lived in it for at least 2 years out of the 5 years prior to selling.

The Bottom Line

Understanding the investment property 6-year rule for capital gains tax is essential for property investors. By leveraging this rule and implementing other tax reduction strategies, you can potentially save thousands of dollars when selling an investment property. However, it's important to consult with a tax professional or financial advisor to ensure you fully understand the rules and regulations surrounding CGT and how they apply to your specific situation.