Taxing Home: Main residence and when you're likely to trigger CGT

Taxing Home: Main residence and when you’re likely to trigger CGT

Everyone knows that you don’t pay tax on the family home when you sell it, right? We take 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 – or CGT – applies to gains that taxpayers make on the sale of capital assets, or more simply, the assets you make money from. Unless an exemption or reduction applies – or a taxpayer can offset the tax against a capital loss – any gain made on an asset is generally taxed at the marginal tax rate.

Generally speaking, the sale of a taxpayer’s home is subject to CGT unless they have an exemption, partial exemption, or they are able to offset the tax against a capital loss. However the main residence exemption remains a tricky part of Australian tax.

In this article, we explore what a main residence is and explainthe main residence tax exemption for tax purposes.

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. For example, where you have moved into your new home while finalising the sale of your old home. This applies if you were:

living in your old home for a continuous period of 3 months in the 12 months before you disposed of it
you did not use your old home to produce an income (rented it out or used it as a place of business) in any part of that 12 months when it was not your main residence, and
your new property becomes your main residence.

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.

If you cannot move in for some unforeseen reason, for example you end up in hospital or are posted overseas for a few months for work, then you still might be able to access the main residence exemption from the time you acquired the home if you move in as soon as practicable once the issue has been resolved. Inconvenience is not a valid reason and you will need to ensure that you have documentation to support your position.

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.

What is the main residence exemption?

Australians who are resident for tax purposes can access the full main residence exemption when you sell your home provided it was your main residence for the whole time you owned it, the land it is on is or is under 2 hectares, and you did not use the home to produce an income – for example running a business from home or renting it out.

If the home is on more than 2 hectares, if eligible, you can treat the home and up to two hectares of the land it is on as one asset and claim the main residence exemption on this asset.

However, if you use your home to produce an income by running a business from home or renting it out, CGT can apply to the portion of the home used to produce income from that time onwards.

Are you foreign resident or Australian resident for tax purposes?

The main residence rules changed in 2017 to exclude non-residents from accessing the main residence exemption.^[1]

The rules focus on your tax residency status at the time of the CGT event (normally the time the contract of sale is entered into). That is, in most cases if you are a non-resident at the time you enter into the contract of sale, you will be unable to access the main residence exemption. This is the case even if you were a resident for part of the ownership period.

Conversely, if you are a resident at the time of the sale, and you meet the other eligibility criteria, the rules should apply as normal even if you were a non-resident for some of the ownership period. For example, an expat who maintains their main residence in Australia could return to Australia, become a resident for tax purposes again, then sell the property and if eligible, access the main residence exemption.

The tax rules also contain integrity provisions that can deny the main residence exemption where someone circumvents the rules by deliberately structuring their affairs to access the exemption – for example, transferring the property to a related party prior to becoming a foreign resident to access the main residence exemption.

It’s important to recognise that the residency test is your tax residency not your visa status. Australia’s tax residency rules can be complex. If you are uncertain, please contact us and we will work through the rules with you.

Talk to your accountant for main residence guidance

If you have any questions about how the main residence rules might apply to you, please contact us on 02 9957 4033 and we will be happy to work though it with you.