Should You Return to Your Rented Melbourne Townhouse to Lock In CGT Exemption?

You’re about 40, earning roughly $109,000 a year, and juggling two properties: a Melbourne townhouse you own (leased out) and a rental you occupy at $550/week. With the six-year capital gains tax (CGT) exemption on your townhouse ending in September 2025, is it wiser to move back in now to save tax, or keep renting and pursue a second investment? Here’s a clear breakdown.

Understanding the Six-Year CGT Rule

The Australian Taxation Office (ATO) allows you to treat a former main residence as your principal place of residence (PPOR) for CGT purposes for up to six years while it’s rented out. To retain full exemption on any gain, you must re-occupy the property before that six-year window closes.

What’s at Stake?

Purchase price (2011): ≈ $550,000
Current market value: $950,000
Estimated capital gain: $400,000
CGT if you move back in by Sept 2025: $0
CGT if you wait and sell in 2027: 50% of gain taxable ≈ $200,000 → ≈ $32,500 tax

Option 1: Move Back Into Your Townhouse

Timing: Return before September 2025 and stay 3–6 months.
Rent savings: $550/week → ≈ $28,600/year.
CGT impact: Full exemption on the $400,000 gain.
Opportunity cost: Loss of rental income ($29,900–$33,800/year) and tax deductions (~$9,750/year).

Option 2: Keep Renting & Buy Another Investment

Up-front costs: Stamp duty ≈ $37,550; Lenders’ mortgage insurance ≈ $15,000.
Loan interest: ≈ $36,400/year on a $560,000 debt.
Tax deductions: ≈ $97,479/year → ≈ $31,700 in tax relief.
Cash flow: Additional outflow ≈ $8,000–$12,000/year.
CGT on townhouse later: ≈ $32,500 in tax (50% of gain taxable).

Which Strategy Is Right?

If your priority is minimising tax and reducing financial risk, move back in. You’ll eliminate CGT, save on rent, and free up extra cash to boost your superannuation or ETF portfolio. If you’re chasing higher passive income and can handle more debt, the second property route may generate greater deductions and rent, but it comes with higher leverage and cash-flow risk.

Final Recommendation

Re-occupy your townhouse before September 2025 for at least three months to secure the full CGT exemption. Redirect the rent savings into your super (up to the $30,000 concessional cap) or other investments for retirement growth. Then in early 2026 review the market and your goals to decide on further acquisitions.

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