When it comes to capital gains tax (CGT), the main residence exemption can help keep your family home tax-free when you sell it. However, like most tax matters, it can sometimes be complicated.
As Darryl Kerrigan famously said in *The Castle*, “It’s not a house. It’s a home.” The Australian Taxation Office (ATO) has a similar view. A home is generally considered your main residence if:
- You and your family live there
- Your personal belongings are in the dwelling
- Your mail is delivered there
- It’s your address on the electoral roll
- You have services like telephone, gas, and electricity connected in your name
- You intend for the home to be your main residence
The length of time you’ve lived in the home is important, but your intention takes precedence. Every situation is different, so there are no hard and fast rules.
When does the main residence exemption apply?
Generally, CGT applies to the sale of your home unless you have an exemption or partial exemption or can offset the tax against a capital loss. If you are an Australian resident for tax purposes, you can access the total main residence exemption when you sell your home if:
- Your home was your main residence the entire time you owned it (see Can the main residence exemption apply if you move out?).
- You did not use your home to produce any income (see Partial exemption below).
- The land your home is on is 2 hectares or less. If your home is on more than 2 hectares, such as on farmland, the exemption applies to the home and up to 2 hectares of adjacent land.
Partial exemption
If you’ve used your home to produce income, you might not be able to claim the total main residence exemption, but a partial exemption could be possible. Common scenarios impacting your main residence exemption include:
– Running a business from home (working from home is okay)
– Renting out the home or part of it
In these cases, the part of the home you started using to generate income is likely subject to CGT. Starting 1 July 2023, platforms like Airbnb must report all transactions to the ATO every six months. This data will be matched against the income reported on income tax returns.
Foreign residents and changing residency
Foreign residents cannot access the main residence exemption, even if they were residents for part of the time they owned the property. If you are a non-resident at the time you sell the property, you likely won’t be able to access the exemption. Conversely, if you are a resident at the time of the sale and meet the other criteria, the rules should apply normally, even if you were a non-resident for part of the ownership period. For example, an expat who maintains their main residence in Australia could return, become a resident for tax purposes again, and sell the property while accessing the main residence exemption.
Remember, the residency test is based on your tax residency, not your visa status. Australia’s tax residency rules can be complex. If you’re unsure, please get in touch with us, and we’ll help clarify the rules for you.
Can the main residence exemption apply if you move out?
You might have heard about the ‘absence rule.’ This rule allows you to continue treating your home as your main residence for tax purposes:
- For up to 6 years, if the home is used to produce income, for example, if you rent it out while you’re away.
- Indefinitely if it is not used to produce income.
Using the absence rule prevents you from applying the main residence exemption to any other property you own over the same period. Apart from limited exceptions, the other property is subject to CGT.
For example, if you moved overseas in 2020 and rented out your home, then returned to Australia in 2023 and moved back into your house, and then sold it in early 2024, you could apply the absence rule and access the total main residence exemption, assuming you are a resident for tax purposes at the time of sale.
The 6-year period also resets if you re-establish the property as your main residence and then stop living there again. If the home was income-producing for a limited period, the entire main residence exemption could still be available if the other criteria are met.
Timing
Your home usually qualifies as your main residence from the point you move in and start living there. If you move in as soon as practicable after the settlement date of the contract, the home is considered your main residence from the time you acquired it.
If you buy a new home but have yet to sell your old one, you can treat both properties as your main residence for up to six months without affecting your eligibility for the main residence exemption. This applies if the old home was your main residence for a continuous period of 3 months in the 12 months before you sold it, and you did not use the old home to produce income during any part of that 12 months when it wasn’t your main residence.
If the sale takes longer than six months, the main residence exemption could apply to both homes only for the last six months before selling the old home. For any period before this, you might be able to choose which home is treated as your main residence (the other becomes subject to CGT).
If your new home is rented out when you purchase it and you cannot move in, it becomes your main residence once you do move in. Suppose you cannot move in due to unforeseen circumstances, such as being hospitalised or posted overseas for work. In that case, you might still access the main residence exemption if you move in as soon as practicable once the issue is resolved. Inconvenience is not a valid reason, and you’ll need documentation to support your position.
Can a couple have a main residence each?
If you and your spouse each own homes you have separately established as your main residences, you can’t claim the total CGT exemption on both homes. Instead, you can:
- Choose one of the dwellings as the main residence for both of you during the period or
- Nominate different dwellings as your main residence for the period.
If you nominate different dwellings, the exemption is split between you:
- If you own 50% or less of the residence chosen as your main residence, the dwelling is considered your main residence for that period, and you will qualify for the main residence exemption for your ownership interest.
- If you own more than 50% of the residence chosen as your main residence, it is considered your main residence for half the period that you and your spouse had different homes.
This rule applies to each home regardless of how they are held legally (sole ownership, tenants in common, or joint tenants).
What happens in a divorce?
If the home is transferred to one of the spouses (and not to or from a trust or company) and both used it solely as their main residence over their ownership period, a full main residence exemption should be available when the property is eventually sold.
A partial exemption might be available if the home qualified for the main residence exemption for only part of the ownership period for either individual. The spouse receiving the property may need to pay CGT on the gain on their share of the property when they eventually sell it.
The main residence exemption might seem simple but can get complex quickly. You’ll need more than just a ‘vibe’ to work with the exemption. As Dennis Denuto in *The Castle* would say, “It’s the vibe of it. It’s the constitution. It’s Mabo. It’s justice. It’s law. It’s the vibe, and ah, no, that’s it. It’s the vibe. I rest my case.”
If you have any questions or need clarification regarding the main residence exemption and how it may apply to your situation, please don’t hesitate to contact our office. We are here to help you navigate the complexities of property tax matters and provide the guidance you need.