Tax Tip 105: Don’t Claim the 6 year rule where there is a capital loss

Don’t Claim the 6 year rule where there is a capital loss


Most readers will know about the 6 year rule whereby a person can be absent from their main residence, rent it out for up to 6 years, yet still claim it as the main residence and thereby avoid having to pay CGT. See Tax Tip 23: The 6 year Absent from Main Residence Rule


But the application of the 6 year rule is optional – the property doesn’t need to be claimed as the main residence while you are absent.


The sums should be done before claiming the exemption because in some instances there may not be a capital gain but a capital loss. If there is a capital loss you won’t have any tax to pay, but you will be a loss which can be used to offset other gains in the same year or, if there are none, the loss can be carried forward to later years. This could save you CGT in the future.


As the market turns this could help save you tax.


Example. Zheng bought a $500,000 property in 2010. He paid $30,000 in costs such as stamp duty and lived in it for 1 year. He then moved back home and rented it out. It was worth $510,000 at that point. A year later he later sold it for $520,000 but had to pay about $15,000 in costs for the sale.


Zheng thinks he made a profit of $20k at first though. But doing the numbers his cost base is the value the time it first produced income which was $510,000 and $15,000 in selling costs.


His cost base is $510,000 + $15,000 = $525,000

Sale price is $520,000

Capital Gain is negative $5,000 = a Capital Loss of $5,000


So Zheng has actually made a loss, a capital loss. If he claims the absence from main residence rule (s118-145 ITAA97, the 6 year rule) then he won’t get to carry forward a $5,000 capital loss. So in this instance it may be best not to claim it.

 

This rule is often confused with the main residence exemption. Where a property has always been your main residence then a choice is not available as the capital gain (or loss) is exempt. Any loss is totally disregarded.

The 6 years rule is a choice a taxpayer can make when they first lodge a return to claim / not claim it s118-145(1) clearly describes it as a taxpayer choice.

Moving from a former main residence into rented accomodation and not earning income is also a further example. There is no 6 year cap on capital gains. It is indefinite.

 

Hi Terry and Paul,

Thanks for all of you helpful tips and explanations. Are you able to shed some further light on the below example and not using the 6 year exemption?

Property built in 2008 at an approx. cost of $240k as primary residence. Owners moved straight in after completion.

Vacated property in Nov 2014 and put up for rent. No valuation carried out on the property and no further PPOR purchased by owners. Est valuation at this point is $350k.

6 years is now nearly up since owners vacated and estimated valuation of property is $300k. Property is still rented out.

Is it possible to get a valuation completed for a date in the past, claim the PPOR CGT exemption for the period up to 2014, then claim a CGT loss for the period since if the property was to be sold?

Please let me know if further information would help.

Again many thanks for the invaluable information.

 

This sort of scenario is exactly what this thread is about. Get some tax advice and save some money

 

There wont be a tax saving, as such, not at present ...but maybe one day. The CGT loss would merely carry forward but in the future if a CGT gain occurs from shares sales, other property sale or even investment income it could see that other future CGT income as tax free on the part. That benefit could be as much as 50% x the loss amount (ie $25K x your marginal tax rate = 8,500 - $10K ?)

If the main residence exemption and the 6 year absence rules were to be used there would be no CGT loss to carry forward.

Is the historical valuation worth $8500-$10 K ? I would think so.

 

Thanks very much for the info.

Just to confirm it is possible to do a valuation on a property and set a cost base for 2014 now? The ship hasn't sailed on that?

 

Yes. You may need to use a reg valuer to access that data and assess its past value at the specified date in 2014. Explain what you need it for. Valuers are asked to do this a bit.

 

Hi

Would love some feedback on ability to claim a capital loss in my current scenario.

We purchased property in 2018 for 720k.
We lived in this property until March 2022 where we got an agent valuation of 1.05M (peak of market)
We moved into a rental March 2022, and rented our property out as investment.
We sold the house in June 2023 for 920k

Obviously there has been a capital gain since we purchased the property (200k) and if we applied the 6 year rule we would be exempt from CGT. Since having the property as an investment, there has actually been a capital loss of 130k. If we don't apply the 6-year rule, are we able to claim the 130k as a capital loss and carry this forward for tax purposes?

There is an example of this on the ATO for a capital gain scenario but not for a loss, so any feedback would be great!

GM

 

Yes its a exempt loss if the main residence absence rule is used. That is a choice.
Otherwise it may be a loss but the reduced costbase must be considered. Selling costs may also factor into this with settlement adjustmnets etc. The agent valuation also may or may not be reliable for use. I dont agree the loss is $130K.

A CGT loss is shared by owners and carries fwd and doesnt offset other income. Only future gains BEFORE any discount is applied.

Insufficient information .

 

Thanks for the quick response Paul.

Based on the example on the ATO website, it says

HOST:
Let’s say Michael bought his home in 2006 for $400,000, and later started renting it out in 2010, when its value was $500,000.
In this case, Michael wouldn’t use the purchase price of $400,000 as part of his costs. Instead, Michael would use the market value of the property when it was first rented out. That is – the $500,000 amount.
HOST:
Michael could have determined this at the time from local real estate agents, or from a qualified valuer.

Based on this using a local agent valuation would be sufficient/reliable?

Thanks GM

 

I havent seen what the agent gave you. Is it one page ? If so its unreliable. Is your apparent CGT loss more or less because of this ? Bad vals can be costly when they are free.

 

This thread is about exactly that sort of situation

 

Similar to what Paul is saying, there are examples on ATO site indicating things to include to support the valuation.

REA can be used but include details such as: address, date, details of property, other comparable properties amongst others to support the valuation given (see ATO).

So a one page letter saying 1 Smith St is worth $1.05M is weak and likely isn’t enough, but a 4 page report showing details to support value that comes to that conclusion could be.

 

I Have spoken to the poster and the val does appear compliant. This is a common question. A agent one pager fails but a comparable sales type summary can even be retained info by a taxpayer...perhaps