By Toni Case

When it comes to property, one important fact is widely known, however one isn’t. The most celebrated fact, and the chief financial reason why people buy a home to live in, is that when you sell it any profit derived is capital gains tax-free. The largely unknown fact – and one that could come in handy for anyone burdened with a large mortgage who is nervous about selling – is that you may be able to rent out your residence, and at the end of the day sell it for a tax-free gain.

With home affordability hitting record lows and interest rates creeping higher, it’s important that property owners have all the facts and figures at their disposal. Indeed, temporarily renting out a residence could be preferable to selling a property at a loss, particularly if ballooning mortgage repayments start to become unmanageable.

The handy thing about renting out your home - other than the obvious benefit of receiving rent - is that interest payments on your mortgage, any repairs and maintenance costs on the property as well as other fees may be tax deductible. The net effect is that these extra funds (rental income plus tax savings) can be channelled towards paying off your mortgage.

Astute investors should be questioning the legitimacy of this strategy: how can a property that is used to produce income – in other words, an investment property – be eligible for the main residence exemption (where any profits derived from the sale are capital gains tax-free)? The quick answer is: provided the property is rented out for less than six years before it’s sold and the owner doesn’t have another principal place of residence, then the main residence exemption still applies.

This means that a homeowner could potentially live in their home for two years, rent it out for five years (reducing their mortgage in the meantime) and then sell it, without forfeiting their main residence exemption. In fact, a homeowner could live in their home for two years, rent it out for five years, return to live in it again for one year and then rent it out for a further five and a half years, before selling it. Provided the homeowner hasn’t rented the property for more than six years in a row, they can maintain their main residence exemption for that property.