There are several important considerations taxpayers need to understand about building, repairing or renovating a home that is considered to be a 'main residence' for tax purposes, particularly if it is later sold for a capital gain.
Generally speaking, a main residence is exempt from capital gains tax because it is assumed that you occupy the dwelling as your main residence once you've completed your build or renovation.
While the exemption normally only applies while a taxpayer is actually occupying the dwelling as their main residence, the rules have some exceptions for people who are building, repairing or renovating their property.
If you have bought land to build on or a property that requires renovation and repairs, then the rules allow a taxpayer to treat a property as a main residence while the build or renovation is underway. This is called a construction concession and two requirements must be met to maintain your CGT-free status:
- You need to move in as soon as practicable once the home is built or the renovations & repairs are complete.
- You need to live in the property for at least three months.
Both of these conditions need to be satisfied to ensure that construction concession can apply and you don't get caught by CGT.
A main residence exists when a property is occupied for at least three months, for example:
- You and/or your family live there
- Your personal belongings are in it
- It is where your mail is delivered
- The address is listed on the electoral roll
- The property has services connected such as electricity, phone and gas in your name. .
It's important to keep good records of the time you occupied the house or dwelling so that you can demonstrate that you've occupied the property for at least three months after the building has been complete or renovations finished. These may include:
- Your licence
- Utility bills (Gas, electricity, phone)
- Electoral roll
- Other documentation that can prove your occupation
One thing to consider - and properly document - is what happens if you move out of your property but don't sell it. Generally you can claim a main residence exemption for six years, even it if it is being used for income producing purposes, such as renting to tenants. The six year rule can be used for each period of absence, provided it is documented properly.
If you move out of your property but don't use it for income producing purposes, then it can be treated as a main residence indefinitely.
However re-establishing the property as your main residence relies on a number of things, such as mail going to the house, utilities connected to the property and so on. These are factors the ATO will consider when assessing the main residence exemption.
It goes without saying that keeping and maintaining detailed records and supporting evidence is necessary to prove your main residency exemption eligibility and that documentation may be required by the ATO well after your occupancy has ended. If you have not documented your main residence status properly, then you may be up for any capital gain achieved on the sale of the property.
There are a number of other rules that apply to the main residence exemption and your accountant provide guidance on the CGT considerations applicable to your property, particularly where you are building, renovating or repairing a home. Contact us on 02 9957 4033 for more information.
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Last updated November 2013. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.