The tax rule that you need to know about

Anthony Java is just a few months away from his 30th birthday, but he has already accrued seven investment properties.

Four years ago, he bought his first home for less than $400,000. Now, he has a portfolio worth more than $2.5 million across Sydney, Brisbane and Melbourne and is set to utilise a little known tax advantage to sell his first property capital gains tax free.

Working as a salesman in Sydney, he was earning about $80,000 when he started his portfolio.

Anthony Java owns seven investment properties at age 29. Photo: Michele Mossop

Having spent money every year on “fancy food and jewellery”, he was shocked into the reality by his lack of assets by his accountant – 26-year-old Jeremy Iannuzzelli, who owns eight properties himself.

“I bought my first home that year,” he said. “I bought just before the boom – [the property has] pretty much doubled in value.”

Taking advantage of the benefits of buying off the plan, he bought a $393,000 home in western Sydney’s Glenfield and received the $15,000 First Home Owners Grant and a stamp duty exemption of about $13,000.

After 12 months of living in the property, he moved back home with his parents in the western suburbs, which allowed him to rent it out and pay it down while claiming negative gearing benefits. During the following years, he used a combination of savings and equity in his initial home to buy investment properties. The home is now worth about $680,000.

“I grew up in the west with migrant parents who were not in a situation where they could give me money [to buy a home] … they invested in my education,” he said.

“Young people [often] complain Sydney prices are unaffordable but they’ve spent the last five years in Europe – if you make that choice, then good on you, but it’s not impossible to buy a house.”

Just recently making a six-figure income, he’s now considering another investment property in Christies Beach, South Australia.

He’s also considering selling the Glenfield property and, with some tax planning, should be able to avoid paying capital gains tax on the $300,000 gain he has made during the property boom.

This strategy, which Mr Iannuzzelli calls the “six-year rule”, effectively allows first home buyers to become a rentvestor, claim negative gearing benefits while receiving income from a tenant, and sell for a profit without incurring a CGT bill.

Tax law allows an owner to rent out their home for up to six years after they have stopped living in it, and still treat it as a main residence come time to sell – provided they don’t buy another property as a home in the meantime.

Using this exemption has been “extremely common” with many of Mr Iannuzzelli’s under-30 clients who want to invest, but don’t want to lose their first home buyer benefits or would struggle to afford the repayments.

“It’s a strategy for those who don’t want to live there forever but are using it to get into the market,” he said. “They buy a house, live in it for six to 12 months, then move back to mum and dad to pay down the debt aggressively,” he said. Others might choose to rent somewhere affordable, such as a sharehouse.

But he said the strategy was little-known among younger buyers generally who tend not to have in-depth knowledge of the tax system.

For those unwilling to sell at the end of the cycle, but still hoping to keep the tax benefit: “Move back in, live in it for another year and the whole cycle starts again,” he said.

One of his clients has moved back in and out of the property “for 20 years”, leaving him with $900,000 in profit tax-free.

However, the home owner needs to establish they are living in the home first and have the intention to live there, Property Tax Specialists principal adviser Shukri Barbara said.

This includes registering on the electoral roll, connecting services and spending at least 12 months in the home, he said.

But he warned that while it might seem simple enough to plan to achieve the exemption, “life doesn’t happen like that” and it was a “small minority” regularly using the rule.

An ATO spokesman confirmed the strategy has been allowed under tax law since 1985, provided another dwelling is not being treated as a main residence.

“The property can be used as a rental property during an absence of up to six years and the person may continue to qualify for the CGT exemption. It may be negatively geared,” the spokesman said.

They do not collect data about the use of the exemption, but undertake data match on disposals of property, he said, and have a focus on “situations where it is clear that the person was not residing in the property for the full period of ownership”.

Property Investment Professionals of Australia chair Ben Kingsley said it wasn’t commonly used by his clients, and was typically an exemption for those who moved for work or other relocation purposes.

What you need to know about the tax rule

– You need to live in the home when you buy it, with recommendations of about 12 months

– When you move out, you can use the home as a rental property for up to six years

– You usually cannot treat any other dwelling as your main residence for the six years

– The property can be negatively geared

– It does not have to be a continuous six years of renting the home