Director Pam Badke takes a closer look at the main residence exemption that excludes your home from capital gains tax and the triggers that reduce or exclude that exemption.
Capital gains tax (CGT) applies to gains you have made on the sale of capital assets (assets you make money from). Unless an exemption or reduction applies, or you can offset the gain against a capital loss, any gain you made on an asset is taxed at your marginal tax rate.
What is the main residence exemption?
Your main residence is the home you live in. In general, CGT applies to the sale of your home unless you have an exemption, partial exemption, or you are able to offset the gain against a capital loss.
If you are an Australian resident for tax purposes, you can access the full main residence exemption when you sell your home if your home was your main residence for the whole time you owned it, the land your home is on is or is under 2 hectares, and you did not use your home to produce an income – for example running a business from your home or renting it out.
What’s a main residence?
For CGT purposes, your home normally qualifies as your main residence from the point you move in and start living there. However, if you move in as soon as practicable after the settlement date of the contract, that home is considered your main residence from the time you acquired it.
If you cannot move in straight away because you are in the process of selling your old home, you can treat both homes as your main residence for up to six months without impacting your eligibility to the main residence exemption.
If the sale takes more than six months and if eligible, the main residence exemption could apply to both homes only for the last six months prior to selling the old home. For any period before this it might be possible to choose which home is treated as your main residence (the other becomes subject to CGT).
If your new home is being rented to someone else when you purchase it and you cannot move in, the home is not your main residence until you move in.
Proof that your property is first established or continues to be your main residence is subjective and if the issue is ever queried, some of the factors the ATO will look at include:
The length of time you have lived in the dwelling
- Where your family live
- Whether you moved your personal belongings into the dwelling
- The address you have your mail delivered
- Your address on the Electoral Roll
- Your connection to services such as telephone, gas and electricity, and
- Your intention
I have inherited a property, if I sell it, do I have to pay CGT?
Special rules exist that enable some beneficiaries or estates to access a full or partial main residence exemption on the inherited property. Assuming the house was the main residence of the deceased just before they died, they did not then use the home to produce an income, and the other eligibility criteria are met, a full exemption might be available to the executor or beneficiary if either (or both) of the following conditions are met:
- The dwelling is disposed of within two years of the deceased’s death; or
- The dwelling was the main residence of one or more of the following people from the date of death until the dwelling has been disposed of:
- The spouse of the deceased (unless they were separated);
- An individual who had a right to occupy the dwelling under the deceased’s will; or
- The beneficiary who is disposing of the dwelling.
An extension to the two year period can apply in limited certain circumstances, for example when the will is contested or complex.
If the deceased did not actually live in the property prior to their death and other eligibility criteria are satisfied, it still might be possible to apply the full exemption where the home was treated as their main residence under the absence rule.
If the full exemption is not available, a partial exemption might apply.
If you have any questions about how the main residence rules might apply to you, please drop us a line on 4638 5300 and the MLP team will be happy to work through it with you.
