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The Six-Year Rule · My Accounting Advantage

• 0:03
  Speaker 1: Hello and welcome back to the podcast My Accounting Advantage.
• 0:07
  Speaker 1: Today we are going to be discussing the Six Year Rule, which could be a bit of a myth for a lot of people as they don't understand how it works, which is exactly why this podcast exists.
• 0:19
  Speaker 1: Please welcome back to the podcast.
• 0:21
  Speaker 1: My Harris.
• 0:22
  Speaker 1: Mai, welcome back.
• 0:23
  Speaker: Thank you, Lee.
• 0:24
  Speaker: Nice to be back.
• 0:25
  Speaker 1: Take us into the six-year rule myth.
• 0:29
  Speaker 1: Why it does not always save your capital gains tax.
• 0:33
  Speaker 1: Take us into it.
• 0:34
  Speaker: Yeah, so the six-year rule is a very popular question at the moment because people are looking at ways to rent their own home.
• 0:44
  Speaker: So it becomes an investment property and they can still apply the negative gearing to it.
• 0:51
  Speaker: Because, as we all know, from 12th of May 2026, you know, if you purchase the property after that date, the negative gearing for existing home is no longer available.
• 1:06
  Speaker: What you can do, you can actually rent the house that you're living in and still claiming negative gearing.
• 1:14
  Speaker: And I have several clients who asked me about, you know, how does the rule work?
• 1:20
  Speaker: I'll go through what the six-year rule allows you to do first.
• 1:24
  Speaker: It's a rule that allows you to move out of your home and rent it while potentially continue to treat it as your main residence for CGT purposes.
• 1:35
  Speaker: So what does it mean?
• 1:36
  Speaker: It means that you can actually vacate your principal place of residence.
• 1:42
  Speaker: So I'm going to refer this one's a bit long as PPOR.
• 1:46
  Speaker: So you can vacate your PPOR and then rent it out.
• 1:51
  Speaker: So it generates rental income.
• 1:54
  Speaker: And then you can convert your home loan into a deductible home loan so that you can claim negative gearing on it whilst you're actually renting elsewhere.
• 2:08
  Speaker: That will actually often save you on your cash flow if cash flow is tight.
• 2:17
  Speaker 1: So if someone's bought a two-bedroom home unit, they're living in it, and then they have children and decide they need to go and get something bigger, they could rent out their home unit.
• 2:28
  Speaker 1: What do they have to do to convert the loan into an investment loan?
• 2:32
  Speaker 1: Yeah.
• 2:33
  Speaker 1: Versus they were living there, principal place of residence, it was their loan.
• 2:37
  Speaker 1: How does their accountant even pick up that you can now claim negative gearing on that?
• 2:42
  Speaker: Okay.
• 2:42
  Speaker: So the HO doesn't really care if the loan status is actually, you know, for your principal place of residence originally, it doesn't matter.
• 2:53
  Speaker: It does not need to be an investment home loan for you to claim tax deduction on.
• 2:59
  Speaker: What they care about is, you know, that it has a connection between the income-producing asset to the expense.
• 3:11
  Speaker: So if that loan is primarily used for that income-producing asset, which is the rental property, well, then the interest on loan is tax deductible.
• 3:23
  Speaker 1: Very good.
• 3:24
  Speaker 1: So lots of people out there wouldn't know that.
• 3:27
  Speaker 1: And they've actually moved out because of other reasons.
• 3:30
  Speaker 1: They didn't even think about negative gearing and suddenly they're in a position to do that.
• 3:34
  Speaker 1: How do they claim that negative gearing?
• 3:36
  Speaker: So basically, um, for example, you know, your two-bedroom apartments and um the family wants to upgrade, so they may not be looking at buying another primary place of residence yet.
• 3:49
  Speaker: So they would move out, they'll go and rent a bigger house, and then they rent out their two-bedroom apartment.
• 3:56
  Speaker: So the two-bedroom apartment might be producing five hundred, you know, dollars a week, and then um the interest on loan might be $700 a week, depending on the loan balance, of course.
• 4:12
  Speaker: So that means the rent doesn't quite covered the expense, which is the interest expense.
• 4:19
  Speaker: So you actually have a loss of $200 a week.
• 4:23
  Speaker: So that loss you can claim that, I mean, annually, like you annualize it.
• 4:28
  Speaker: So around about, you know, um over $10,000 of the losses that you made, that will come off your taxable income.
• 4:38
  Speaker: And that is negative gearing.
• 4:41
  Speaker 1: Very good.
• 4:41
  Speaker 1: Why does this rule exist?
• 4:44
  Speaker: So it exists so that in encourage people to invest, you know, in properties.
• 4:50
  Speaker: And that's why the federal government abolished it in the first place, um, and it's now becomes law that uh what we no longer can purchase an investment property and use negative gearing after the budget night, which is the 12th of May 2026, and that is law now.
• 5:15
  Speaker: So which means that if you actually purchase an existing home, so it's only applicable to existing homes, so um don't get it mixed up with new homes.
• 5:24
  Speaker: Um, if you ex um purchased existing home for an investment property and you running a loss because your interest expense exceeded your rental income, well, you can't claim that gap anymore against your um taxable taxable income, your other income.
• 5:45
  Speaker: But yeah, if that rule still exists for the property that was purchased before 12th of May 2026.
• 5:56
  Speaker 1: Can they go out and buy another home while this is going on?
• 5:59
  Speaker: They can.
• 6:00
  Speaker: So it they can buy another home and then choose to have that home as their new principal place of residence.
• 6:11
  Speaker: But if they do that, that's when the six-year rule will stop.
• 6:17
  Speaker: So what the six-year rule does, that's why it's called six-year rule, is it allows you to move out, rent it out for income producing, and then claim tax deduction on the interest, but you can only do it up to six years and it's only applicable to the sale of the property itself.
• 6:41
  Speaker: If you were to sell the prop that the property within that six years, you'll be able to apply the primary place of resident CGT exemption, which means you don't have to pay capital gains on the sale of the property.
• 6:58
  Speaker: And you basically have up to six years to rent that PPOR out and then sell it, no CGT consequences.
• 7:09
  Speaker: However, if you choose to um move back after that six years or before the six-year ends, it triggers another six-year.
• 7:20
  Speaker: So if you're thinking that, oh, I'm I'm not ready to sell yet, but my six year is nearly up, you can move back.
• 7:28
  Speaker: But you need to reside in the property for like 12 months and it it it restarts that six-year rule again.
• 7:34
  Speaker: Back to you know, your question, what if I bought another PPOR?
• 7:39
  Speaker: Six-year rule is finished.
• 7:41
  Speaker: So that new PPOR will um be your next home that you can apply the principal place of resident CGT exemption. So, what you need to do is to protect the capital growth on your first home for when you look to sell it next. You need to get a property valuation, either from a licensed property valuer or a reputable real estate agent and obtain a market value at that point.
• 8:23
  Speaker 1: My what records do you need to keep in place and what records matter?
• 8:29
  Speaker: Yes, so you know, having good records is really important for tax purposes anyway.
• 8:34
  Speaker: But especially in this case, if you look at applying the six-year rule, you really need to establish the timeline and you need to document, you know, when you purchase the the property.
• 8:49
  Speaker: And the key thing is to apply the six-year rule, you must live in the property first and genuinely live there as your principal place of residence.
• 9:00
  Speaker: Okay, so that is a must.
• 9:03
  Speaker: And then once you pass that question, you need to go, okay, so when did I move out?
• 9:09
  Speaker: How many years have I rented it for?
• 9:13
  Speaker: And during that period, have I purchased another PPOR?
• 9:18
  Speaker: If I have, well, then I need to think about market valuation.
• 9:23
  Speaker: When I vacated the property or when, you know, the six-year rule end.
• 9:28
  Speaker: The record stands, you know, that needs to be even a diary, and you need to be able to report that should the audit comes from the ATO.
• 9:43
  Speaker: So most importantly, let your accountant knows, you know, of your intention, and then they can help you plan for it.
• 9:51
  Speaker 1: So the valuation would create a date in time.
• 9:54
  Speaker 1: The lease that you have on renting the property creates a document date in time.
• 9:59
  Speaker 1: Yeah.
• 9:59
  Speaker 1: And then you moving back in and paying your own gas and electricity gain a date in time, and then the rates.
• 10:07
  Speaker 1: So there's quite a few natural documents, but having them all in order so that if there is any investigation, you are covered and you know your timelines.
• 10:17
  Speaker: That's right.
• 10:18
  Speaker: Yeah.
• 10:18
  Speaker: So um it's not just saying that I live there.
• 10:22
  Speaker: So you know, your utility bills need to reflect that too.
• 10:26
  Speaker: You need to be able to produce evidence that you you genuinely lived in that property.
• 10:31
  Speaker: Like, um, you know, you've changed your driver's license, you have all your mail redirected to that property, and that will give you, you know, uh comfort that your claim would not be denied by the ATO.
• 10:47
  Speaker 1: What are the common mistakes with this one?
• 10:50
  Speaker: Well, let me list it out for you.
• 10:52
  Speaker: So, number one is assuming the six-year rule automatically eliminates CGT.
• 10:58
  Speaker: So that could be the case, but may not be the case.
• 11:03
  Speaker: So it depends on, you know, your situation and um the timeline where you purchased the property when you vacate, you know, when you rented it out, and um, did you go back into the property, etc.?
• 11:17
  Speaker: So, you know, do not assume that you can just apply it and then you don't have any, you know, CGT obligations when you sell the property.
• 11:26
  Speaker: The next one is thinking every property can be treated as tax-free main residence.
• 11:31
  Speaker: Not really.
• 11:32
  Speaker: You need to document everything and then uh make sure that your accountant do an assessment before you make that assumption.
• 11:41
  Speaker: And then the next one is not obtaining market valuations when circumstances change.
• 11:46
  Speaker: I have had this happen many times.
• 11:49
  Speaker: So when the clients move out of their main residence and then they didn't obtain valuation, to do it afterwards, that can be, I mean, it's possible, but can be difficult.
• 12:01
  Speaker: So it would be a good practice to just when you move out of the property that um you lived in, just ask a real estate agent to do, you know, a valuation and also back it up with the historical sales as well.
• 12:17
  Speaker: Don't just sometime you can get contradicting reports.
• 12:22
  Speaker: So just be careful with that.
• 12:24
  Speaker 1: And just on that, yeah, the real estate agent can do an assessment of value.
• 12:29
  Speaker 1: Yes.
• 12:30
  Speaker 1: Whereas a registered valuer will do the valuation.
• 12:34
  Speaker 1: Do you see a discrepancy in those numbers when the registered valuer comes out based on historical knowledge, which is the agent's doing as well, but the agent's also looking at the forecasting market?
• 12:46
  Speaker 1: How do you get a a neutral number out of that?
• 12:50
  Speaker: Yes.
• 12:50
  Speaker: So it might help if you want to strengthen your case to get a couple of um valuation for um from separate real estate agents.
• 13:01
  Speaker: I mean, the ATO prefer the licensed valuer.
• 13:05
  Speaker: That's right, to come out and do valuation.
• 13:09
  Speaker: But let's face it, cost money.
• 13:12
  Speaker: So yes.
• 13:14
  Speaker: And that's the but they're never specified in any tax ruling that you required a licensed valuer.
• 13:22
  Speaker: So that's an interesting point.
• 13:24
  Speaker: So yeah, um, I think you just need to obtain sufficient records to um substantiate your position.
• 13:31
  Speaker: And then um I'll keep going.
• 13:34
  Speaker: There's two more.
• 13:35
  Speaker: So um some people, you know, they purchased a second home without understanding the CGT implications.
• 13:42
  Speaker: So to me, when you're purchasing or thinking or planning to purchase a property, it is one of the biggest assets that we will own in our lifetime.
• 13:52
  Speaker: You need to go and see someone, obtain some advice.
• 13:56
  Speaker: I get it, it's going to cost you money, but it's an investment.
• 14:00
  Speaker: Because if you get it wrong, it's really going to be hard and costly to reverse.
• 14:06
  Speaker: And some sometime you can't reverse it.
• 14:10
  Speaker: You know, you'll be paying another set of stamp duty, and that will cost you even more.
• 14:14
  Speaker: So that, you know, $350, $500, whatever you're paying, it's will pay for itself.
• 14:23
  Speaker: It's such an investment.
• 14:24
  Speaker: So go and get advice.
• 14:26
  Speaker: And then the last one is, you know, people wait until the property is being sold before seeking advice.
• 14:34
  Speaker: Please be prepared before you thinking about selling.
• 14:39
  Speaker: Ask your advisor the um projected tax consequences and give them time.
• 14:45
  Speaker: Don't rush them because a lot of the time people go, I want an answer now, I want it over the phone.
• 14:50
  Speaker: And, you know, when people are under pressure, they don't look at um your circumstances deeply enough, and the advice may not be the right one.
• 15:00
  Speaker: And, you know, we all had that happen in our lives before, where we made mistakes um because we're rushing our, you know, analysis, or we don't do it at all, and then we make a decision thinking that, yeah, it's right.
• 15:16
  Speaker: But I mean it may not.
• 15:18
  Speaker: So give it time.
• 15:20
  Speaker 1: My such a great podcast today.
• 15:23
  Speaker 1: I've had a lot of people ask me about this of late as they look at their changes in life.
• 15:28
  Speaker 1: Yeah.
• 15:29
  Speaker 1: And some people make a mistake of selling their house, thinking they're doing the right thing, and then say, why did we ever sell it?
• 15:35
  Speaker 1: We preferred it there.
• 15:36
  Speaker 1: To know you could, let's say someone is thinking of moving and they think, okay, let's go and rent where we're thinking about living.
• 15:44
  Speaker 1: Yeah.
• 15:45
  Speaker 1: Let's rent this one out.
• 15:46
  Speaker 1: And when when we feel we are right, we'll make that decision.
• 15:50
  Speaker 1: But at least then you're not getting caught out.
• 15:52
  Speaker 1: Yeah.
• 15:53
  Speaker 1: And understanding that you've got the six-year rule here, and if you move back in, it re-triggers it.
• 15:58
  Speaker 1: I think that was a great tip today.
• 16:00
  Speaker 1: But what's your final executive summary?
• 16:02
  Speaker: So with me, um, before I give you the summary then, one more point that I want to let the listeners know that if you actually own two properties, you can choose which one you want to apply your principal place of residence CGT exemption on.
• 16:22
  Speaker: So you can actually do an analysis on the tax consequences before you make that decision as well.
• 16:30
  Speaker: So that's a good tip.
• 16:32
  Speaker 1: Very good tip.
• 16:32
  Speaker 1: What is our summary?
• 16:34
  Speaker: Yep.
• 16:34
  Speaker: So the summary is if you own an investment property, a former family home, or you are planning to move and rent out your current residence, don't assume the six-year rule automatically protects you.
• 16:48
  Speaker: Um, you need to review your property timeline, ownership history, and market values today.
• 16:55
  Speaker: So it could save you significantly on capital gains tax in the future.
• 17:00
  Speaker: So it's so important, again, to book an appointment with your advisor before you make that, you know, chain before you make that move, make that change.
• 17:12
  Speaker 1: I have one final question.
• 17:13
  Speaker 1: Let's say we have a retired couple.
• 17:20
  Speaker: Yeah.
• 17:21
  Speaker 1: And they're thinking, we're gonna rent out our house, we're gonna go and travel or do something.
• 17:25
  Speaker 1: Yeah.
• 17:26
  Speaker 1: And it's the big family place of residence, they're getting very good rent for it.
• 17:30
  Speaker 1: Do they what's the tax implications of that new income coming in?
• 17:35
  Speaker 1: Can they put it into super or what can they do?
• 17:37
  Speaker: So if they're retired and um that income then they're not relying on, so they're receiving it, so that will be taxable, right?
• 17:46
  Speaker: Um, even though you're traveling or living um overseas because it's connected to Australia, it is still taxable in Australia.
• 17:53
  Speaker: So what you can do, you once um you lodge your tax return, you know, and before that, before 3th of June of any particular financial year, you can put that money into super.
• 18:06
  Speaker: If you are under the age of 75, it still can be applied as tax deductible super contribution for you so that you are only paying a minimum tax of 15% on the contribution.
• 18:20
  Speaker 1: Absolutely amazing.
• 18:22
  Speaker 1: My another great podcast.
• 18:24
  Speaker 1: We'll look forward to seeing you next week.
• 18:26
  Speaker: Looking forward to it.
• 18:27
  Speaker: Thank you, Lee.