One Strategy to Get Onto the Property Ladder

When you purchase a property, it can be either as a main residence or an investment property. The choice you make will dictate how the capital gain taxes are applied.

There are no capital gains on your principal place of residence, but it’s a different story for investment properties, where a capital gains tax will be applied when you make a profit from the sale of the dwelling.

However, there is a way to sell your investment property for a tax-free gain.

The Australian Taxation Office does allow capital gains tax exemptions for rental properties under specific circumstances. If you rent your prime place of residence out for up to six years, you can still claim prime residency status and so incur no capital gains tax.

As long as you don’t nominate another dwelling as a main residence.

It’s commonly called the ‘six year rule’ and it’s worth investigating. Effectively it allows first home buyers to claim negative gearing benefits and a whole host of tax deductions, while receiving income from a tenant.

That rental income plus tax savings can be channelled towards paying off your mortgage very quickly.

The six-year rule was established to allow for those who have job transfers, either regionally or overseas.

However, you could still technically use it to move to the next suburb, just a few hundred metres away.

There are conditions surrounding the exemption from capital gains tax, and more information can be found through the Australian Taxation Office and by seeking professional financial advice. But you won’t be blazing any trails by using this tax strategy, because according to Domain, it’s a strategy many savvy investors are using to get onto the property ladder.

They buy a house, live in it for 12 months, then move back with mum and dad, and rent it out, paying down the debt very quickly. Those who don’t have the mum and dad option simply choose to rent somewhere more affordable, such as a sharehouse.

And here’s the real kicker, if the owner moves back into the property after having rented it out for some time, a further period of six years starts to run if the property is rented again in the future.

In other words, for those who don’t want to sell at the end of six years, they can move back in, live in it for another year, and the whole six year cycle starts again.

This means that a homeowner could potentially live in their home for a year and rent it out for five years. Then live in their home again for a year, rent it out for five more years, and on it goes.

Provided the homeowner hasn’t rented the property for more than six years in a row, they can maintain their main residence tax exemptions for that property. All the while having someone else working hard to pay it off.

So where a property has capital growth potential and the personal circumstances allow it, extending the exemption by reoccupying the property at regular intervals results in a nice tax free gain on the sale when all conditions are met.

Domain quotes one investor as having moved back in and out of the same property for 20 years, leaving him with $900,000 in profit completely tax free.

You can also see how this could be a way for struggling homeowners to still own their house if they found themselves unable to afford the repayments. And a way for young adults to get onto the property ladder.

At Cycles, Trends and Forecasts we believe one of the best ways to make money is to borrow as much as you can, buy a good location, and let someone else pay it off for you. Some investors are using the tax laws to their advantage and doing just that.

If you’d like to find out more ways on how to maximise your property assets and to time it all to your advantage, go here.

Regards,

Terence Duffy,
Lead Researcher, Cycles, Trends & Forecasts

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Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come.


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