For small business owners who own property, knowing how the 6-year rule works with Capital Gains Tax (CGT) and your annual income tax return can make a real difference—both to your tax bill and your peace of mind. Many business owners don’t realise that moving out of their main residence doesn’t always mean they have to pay Capital Gains Tax when they sell. In fact, if you follow the rules and keep good records, you can avoid Capital Gains Tax or significantly reduce your CGT liability when you sell your former home, even if you’ve moved out and rented it for a while. This article will walk you through how the 6-year rule works, what you need to do with your bookkeeping, and how to make the most of the main residence exemption—so you can focus on running your business, not worrying about property tax surprises.
The Challenge: CGT and Your Main Residence
Understanding the 6-year rule is crucial for small business owners who’ve moved out of their main residence but want to keep their tax advantages. The rules around Capital Gains Tax and the main residence exemption can be confusing, especially when you’re trying to balance business needs with personal property decisions. Many business owners face common challenges like timing their property sales, managing multiple properties, or keeping the right records to support their claims.
Unsure if you’re keeping the right records for the 6-year CGT exemption?
Schedule a complimentary consultation with us today to review your documents and avoid costly surprises at tax time.
How the 6-Year Rule Works
The 6-year rule (sometimes called the six-year exemption period) lets property owners claim the main residence exemption on their former home for up to six years after they move out, as long as they don’t treat another property as their Principal Place of Residence (PPOR) during that time. This is especially useful if you move for work, change your family’s needs, or need to relocate for business reasons.
If you start earning rental income from your old home, the clock starts ticking on the six-year period. During those six years, you can keep the full main residence exemption—meaning no Capital Gains Tax payable if you sell. But once the six years are up, you start to lose the exemption for each day after that period. If you move back into your main residence during that time, the clock resets, giving you another six years if you move out again.
Common Missteps and Why They Matter
Many small business owners don’t realise how strict the rules are around claiming the main residence exemption. You can only have one main residence at a time for CGT purposes, unless you’re in the special situation of moving from one home to another within the same financial year. But even then, you only get up to six months of overlap.
If you start earning rental income and treat your new place as your main residence, you risk losing the exemption on your former home. This is a common mistake, and it can cost you thousands of dollars if you don’t keep track of your property use and timing.
Record-Keeping: The Foundation of Your CGT Claim
The Australian Taxation Office (ATO) expects you to keep clear records for every property you own, especially if you plan to use the 6-year rule. You need to prove when you lived in your home, when you moved out, when you started earning rental income, and how long you were away. This means keeping things like your purchase contract, settlement statements, rental agreements, and even utility bills or electoral roll documentation.
If you don’t keep these records, you may find it hard to prove your claim if the ATO asks for evidence. That’s why good bookkeeping isn’t just about compliance—it’s about protecting your financial interests.
Practical Steps: How to Claim the 6-Year Rule and Keep Your Books in Order
Getting the 6-year rule right requires careful planning and organised record-keeping. The good news is that once you know what documents you need and how to organise them, the process becomes much more manageable. This section will guide you through the essential records you need to keep, how to handle complex situations like multiple properties, and what to do if your circumstances change.
What Records Do You Need?
To claim the 6-year rule, you’ll need:
Purchase documents (contracts, settlement statements, stamp duty receipts, legal fees)
Proof of residency (utility bills, electoral roll enrolment, letters addressed to you at the property)
Rental records (lease agreements, property management statements, rental income details)
Expense records (repairs, rates, insurance, interest on loans relating to the property)
Professional valuations (a written market value at the time you started earning rental income)
Disposal documents (when you sell, keep all sale contracts, settlement statements, and agent fees)
All these records must be kept for at least five years after you sell the property.
What About More Than One Property?
If you own more than one property, it’s important to decide which one is your main residence for CGT purposes. If you are using the 6-year rule for your former home, you cannot also claim the main residence exemption on another property at the same time. The only exception is if you move from one home to another in the same financial year—you may then be able to treat both as your main residence for up to six months, provided you meet all the conditions.
What If You Become a Foreign Resident?
If you move overseas and become a foreign resident for tax purposes, the rules change. You may lose your access to the main residence exemption entirely. This is important for business owners with international plans. Make sure to get advice from a qualified tax agent if your circumstances change.
What If You Only Used Part of Your Home to Produce Income?
If you rented out a room or ran a business from part of your home before you moved out, you may only get a partial main residence exemption. This means when you sell, only part of your capital gain is tax-free—the rest may be subject to CGT.
Maximising Your CGT Savings
Making the most of the 6-year rule requires smart timing and strategic planning. Whether you’re considering selling your property, managing rental income, or planning for future property investments, understanding how to maximise your CGT savings can make a significant difference to your bottom line. The key is to think ahead and consider all your options within the framework of the six-year exemption period.
Timing Matters
The timing of your sale is crucial. If you sell within the six-year exemption period, you won’t have to pay CGT (assuming you meet all the conditions). If you sell after, you’ll need to calculate how much of your gain is exempt and how much is taxable. The earlier you plan, the more you can potentially save.
Offsetting Your Capital Gain
If you do have to pay CGT, you can often reduce your net capital gain by adding eligible expenses to your cost base. These include things like legal fees, stamp duty, and some improvements. This can help lower your overall tax liability.
Seeking Professional Support
Property tax is complicated. A qualified tax agent or property tax specialist can help you understand how the 6-year rule applies to your situation, check your bookkeeping, and make sure you’re meeting your tax obligations. They can also help you plan your property investment strategy—whether that’s holding, renting, or selling.
Keeping Your Bookkeeping on Track
Effective bookkeeping is the foundation of successfully claiming the 6-year rule benefits. Many small business owners struggle with property record-keeping because they’re focused on running their business, but poor records can cost you thousands of dollars in lost tax benefits. This section will help you set up systems that work for busy business owners, so you can maintain proper records without it becoming a burden.
We’re more than bookkeeping experts
As part of ACT Tax Group, we offer complete accounting and business advisory services tailored to your needs.
Use the Right Tools
If you’re a small business owner, using a cloud-based accounting system can make it easier to keep all your property and business records in one place. This reduces the risk of lost paperwork and makes it simpler to find what you need at tax time.
Regular Reviews
Make it a habit to review your property records regularly. This helps you spot any gaps in your documentation and gives you time to fix them before you need to lodge your tax return.
Working with a Bookkeeper
A bookkeeper can help you set up a system for tracking all the details you need for your main residence, rental property, and any investment properties you own. They can also remind you about important deadlines, like when to get a market valuation or when your exemption period is about to expire.
Common Pitfalls—And How to Avoid Them
Here are the most common pitfalls that property owners face, and simple steps you can take to steer clear of them.
Not keeping records from the start: Don’t wait until you sell to organise your paperwork. Start as soon as you move out.
Claiming the exemption on more than one property: You can only have one main residence for CGT at a time. Be careful if you buy another home while renting out your old one.
Missing key dates: The six-year period starts when you first earn rental income, not just when you move out.
Not getting a market value when required: If you start earning rental income after 20 August 1996, you need a written market value for your property at that time.
Not seeking advice for complex situations: If you’re a foreign resident, use part of your home for business, or have more than one investment property, talk to a tax professional.
Taking Action: Your Next Steps
Now that you understand how the 6-year rule works and what records you need to keep, it’s time to take action. The steps you take today can save you thousands of dollars in CGT and ensure you’re ready when it comes time to sell your property. Whether you’re just starting to rent out your former home or you’re approaching the end of your six-year exemption period, these practical steps will help you get organised and make the most of your entitlements.
Review Your Situation Now
Take some time to look through your property records. Make sure you have all the documents you need to support a claim for the main residence exemption under the 6-year rule. If anything is missing, try to fill the gaps as best you can.
Update Your Bookkeeping Habits
If you haven’t already, set up a system for tracking all your property transactions, expenses, and income. This will make it much easier to complete your annual income tax return and to answer any questions from the ATO.
Consult a Qualified Tax Agent
A qualified tax agent or property tax specialist can review your situation and help you make the most of your entitlements under the 6-year rule. They can also help you with record-keeping and make sure you’re not missing any other CGT exemptions that might apply.
Plan Ahead
Think about your plans for your property. If you’re approaching the end of the six-year exemption period, you may want to sell before it expires. If you’re planning to move overseas, talk to your tax agent about how this might affect your CGT liability.
In Summary
The 6-year rule can help small business owners avoid or reduce Capital Gains Tax (CGT) when selling their former main residence, but only if they meet all the conditions and keep good records. By claiming the main residence exemption for up to six years after moving out—as long as they do not treat another property as their principal place of residence in that time—they may not have to pay any CGT when they sell. However, if their situation changes or they make a mistake with their records, they could end up with a Capital Gains Tax liability and owe more on their annual income tax return.
By understanding your tax obligations and planning ahead, you can make property decisions with confidence and keep your financial future on track. If you’re unsure about any aspect of the 6-year rule, CGT, or your annual tax return, don’t hesitate to reach out for support. The right advice at the right time can make all the difference.
Ready to take the next step? Review your records today and consider booking a chat with a trusted tax professional to make sure you’re making the most of your property investments.
