When you sell your home, you don’t owe any capital gains tax, right? Let’s examine the main residence exemption and how it is reduced or excluded.
Gains on the sale of capital assets (assets you earn money from) are taxed at your marginal rate, unless an exemption or reduction applies, or you can offset the tax against a capital loss.
The main residence exemption
In general, capital gains tax (CGT) applies to the sale of your home unless you have an exemption, partial exemption, or you are able to offset the tax with a capital loss.
You may be eligible for the full main residence exemption when you sell your home if:
- It has been your main residence the entire time you owned it,
- If the land it sits on is less than two hectares, and
- You haven’t used your home to generate income from renting or running a business from your property.
If the property is larger than 2 hectares, it may qualify for the main residence exemption, which allows one to treat the property and the land on it up to a 2-hectare limit as one property.
CGT can also apply to your home from the time you start using it for commercial purposes.
What is a main residence?
For CGT purposes, your main residence is typically considered the home where you move in and start living right away. However, if you move in as soon as the home is settled , it’s your main residence from the moment you acquire it.
If you’re unable to move in straight away because you’re in the process of selling your old house, you can list both homes as your primary residence for up to six months without affecting your eligibility to the principal residence exemption. For instance, where you’ve moved into your new home while your old one is on the market. This only applies if you lived in your old house for three continuous months before the 12 month period before it was sold, if you didn’t make an income by renting or using your old home as a place of business in any part of that time while it was not your main residence, and you sell it and purchase a new property that becomes your main residence.
If the home sale takes more than six months, the main residence exemption can apply to both homes for only the last six months. For any period outside of the 6 months, it is necessary to designate one property as your main residence. If the new home you buy will be rented to someone else until you move in, the house is not your primary residence until you actually move in.
If something unforeseen occurs that makes you unable to occupy the property (you end up in the hospital, for example, or have to be stationed abroad for a few months for work), then you may be able to take advantage of the main residence exemption for the time that you did actually live in it, even if it wasn’t continuous, as long as you move in as soon as is possible after the impediment has been resolved.
Although there is no straightforward definition of a main residence, the ATO may assess any of the following:
- How long you have lived in your home,
- Where in the country your family live,
- If you moved your personal items into the property,
- Your mail delivery address,
- The address you have on the Electoral Roll,
- Connection to services such as telephone, gas, and electricity,
- Your intent.
Are you a resident or foreign resident?
In 2017, the main residence exemption was restricted to residents only.
CGT rules depend on your tax residency status at the time of the CGT event (typically when the sale contract is signed). In most cases, if you are a non-resident when you enter into the contract of sale, you will not be able to claim the main residence exemption. Even if you lived in the property for a portion of the time during ownership.
On the other hand, if you live there and meet the other eligibility criteria, the rules should still apply even if you weren’t a resident during some of the time of ownership. For example, if you are an expat living abroad and then move back to Australia and decide to sell your home and you qualify for the main residence exemption, the sale should still be tax exempt.
What’s key is to note that the residency test refers to the individual’s residency and not to their visa status. It’s difficult to work through Australia’s tax laws if you are unsure, please feel free to contact us.
Furthermore, the tax law may deny an individual’s entitlement to the main residence exemption in circumstances where that person maneuvers the taxation rules so as to achieve this result—say, by transferring ownership of the property to a related party before their relocation.
What if I don’t live at my main residence?
By establishing your home as your main residence, certain circumstances permit you to continue to do so, even when you are no longer living there. The away-from-home rule states that you can still treat your home as your main residence for tax purposes.
- For up to six years, as long as you produce income with it, for example by renting it out while you’re away,
- Indefinitely as long as it is not producing income.
The purpose of this rule is to ensure you can’t avoid CGT on a second property. For that purpose, you cannot use the main residence exemption for any other property you own over the same period.
Suppose you moved overseas in 2019 and rented out your home during your absence. When you returned to Australia in 2021, you moved back into your home. You sold your home in 2022, applying the absence rule and not treating any other property as your primary residence during the same period. If you are a resident at the time of sale, you should qualify for the full main residence exemption.
Similarly, if you re-establish the property as your principal residence and subsequently stop living there but rent it out, the 6 year period resets. If the income-producing status of the home is limited to six years per absence, the full main residence exemption is likely to be available if other criteria are met.
I run a business from home
You cannot apply for a full main residence exemption on your home if it also houses your business. You can only apply for a partial main residence exemption if your only residence is used for income producing assets.
You can usually deduct these occupancy expenses from your taxes if you run your business from home. If you were able to claim or eligible to claim these expenses, then you will only be able to claim a partial residence exemption. If you are able to claim these expenses and did not, then these limitations still apply. It does not matter whether you actually claimed them or not; it only matters that you could have claimed them.
If your home would have qualified for a full main residence exemption before being used as a business, its cost base should be reset for CGT purposes.
The remaining capital gain will need to be checked to see if it qualifies for any small business CGT concessions. We will discuss these rules with you as they are complex.
The main residence exemption should not be affected if you have only worked from home out of convenience and have another office where you normally work. The ATO has confirmed that all that time you spent working from home during the pandemic should not impact your exemption for the main residence.
AirBnB and the exemption
You will not be eligible for the full main residence exemption if you use your home to produce income while you are living there. If you move out completely of the home, the rules might be different – see the earlier section about living out of home.
If you are thinking about renting out part of your home, you should have it valued before you begin. In most cases, there are some rules that apply if you qualified for the main residence exemption before it was rented, and, for CGT purposes, your home is deemed to have been re-acquired at its market value at that time. As a result, if your home has appreciated in value over and above its cost base, any gain you eventually realise should be reduced.
My spouse and I live in a separate residence
It is not possible to claim the full CGT exemption on two homes owned by you and your spouse that have been your main residence for the same period.
You can instead:
- During the period, choose one of the dwellings as your main residence,
- Have different dwellings as your main residence for a period of time.
In the event that you and your spouse nominate different dwellings, you will each receive half of the exemption based on the following:
- The dwelling chosen as your main residence will be considered to be your main residence for the period of time you that you own 50% or less of the dwelling and you will be eligible for the main residence exemption for your ownership interest;
- If you own greater than 50% of the residence chosen as your main residence, the dwelling is taken to be your main residence for half of the period that you and your spouse had different homes.
In the same way, the spouse is bound by the same rules.
Regardless of whether the homes are held as sole ownership, tenants in common, or joint tenants, the rule applies to all of the homes owned by the spouses.
Divorce
Over the last two years, Australia has had the highest divorce rate in a decade. When property settlement occurs, and if certain criteria are met, then the Divorce Rollover Rules may be applied, in order to circumvent any capital gains tax (CGT) relating to the property settlement.
If all of the other eligibility conditions are met, and the home is eventually sold, then the homeowners should be entitled to a full main residence exemption.
If the home was a main residence for only a fraction of either individual’s period of ownership, a partial exemption might be available. The spouse receiving the property may need to pay CGT on his or her share of the gain on the property received as part of the property settlement if it eventually gets sold.
Inheritance and 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 residence is disposed of within two years of the deceased’s death; or
- One or more of the following lived in the home as their primary residence from the date of death until disposal:
- The spouse of the deceased unless he or she is living separately,
- An individual who is legally entitled to the house from the will.
- The individual responsible for distributing the deceased’s home.
Under certain specific circumstances, for example if a will is contested, it is possible to receive an extension to the two-year time period.
Even if the deceased doesn’t actually live in the property before they died, the estate may be eligible to get the full exemption if they meet the exemption criteria in the absence rule.
A partial exemption may be available if the full exemption is not available.
Feel free to reach out to us at MB Accounting & Business Services if you have any questions about the Main Residence Rules, we would be happy to walk you through the process.