Do you own a rental property that you want to make your principal residence?

If so, you might wonder how this will affect your property tax situation. This article will explain the rules and calculations that apply when you move into your rental property and sell it later, and how a property tax accountant can help you.

Let’s look at an example of John and Anne, who bought an investment property on 1 July 2005 for $300,000 and rented it out from day one. They decided to move into the property on 1 July 2021 and make it their main residence. They sold the property on 30 June 2022 for $500,000.

John and Anne made a capital gain of $200,000 from selling the property. However, they are not eligible for the full main residence exemption, because they did not live in the property from the time they bought it. They also cannot use the ‘absence’ rule, which allows you to treat a property as your main residence even if you are not living in it, because they did not live in it before renting it out.

So, how much property tax do John and Anne have to pay on their capital gain? The good news is that they can still claim a partial exemption, because they lived in the property for some time. The formula to calculate their taxable capital gain is:

Amount of capital gain x Number of days rented out / Number of days owned

This equals

$200,000 x 5,843 / 6,208

The taxable capital gain is $188,241

John and Anne can also apply the general capital gains tax discount, which is currently 50%, because they owned the property for more than 12 months. This reduces their taxable capital gain to $94,120.

This is the amount that they will be taxed on according to their marginal tax rates.

As you can see, moving into your rental property can have significant property tax implications. You need to be aware of the rules and calculations that apply to your situation. If you need any help or advice on this topic, please feel free to chat with us at MDB Taxation and Business Advisors, we are professional property tax accountants that can help you with all your taxation and business needs.