In this article, we will 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.
(CGT)
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 tax against a capital loss, any gain you made on an asset is taxed at your marginal tax rate. 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 tax against a capital loss.
So, what are the variables?
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.
If the home is on more than 2 hectares, if eligible, you can treat the home and up to 2 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.
Let’s break that down a bit more.
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. Of course, like anything else, there are other issues to factor in:
- 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.
- 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.
Foreign resident or resident?
The main residence rules changed in 2017 to exclude non-residents from accessing the main residence exemption. The rules now focus on your tax residency status at the time of the CGT event. 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.
What if I don’t live in the house I want to claim as my main residence?
Once you have established your home as your main residence, in certain circumstances, you can treat it as your main residence even if you have stopped living there.
The absence rule allows you to treat your home as your main residence for tax purposes:
- For up to 6 years if it’s used to produce income, for example you rent it out while you are away; or
- Indefinitely if it is not used to produce income.
Running a business from home?
In this scenario, you might only be able to claim a partial main residence exemption. If you are running a business from home, you can usually claim a tax deduction for occupancy expenses such as interest on the mortgage, council rates, and insurance. If you claimed or were eligible to claim these expenses, then you will only be able to access a partial main residence exemption. Also, if only a partial main residence exemption is available, you will need to check whether you can access the small business CGT concessions on any remaining capital gain.
Earning from AirBnB?
If your home has been used to produce income while you are living in it, the portion used to produce income will be excluded from the main residence exemption.
Can I have a different main residence to my spouse?
The rules do not allow you to claim the full 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 and your spouse nominate different dwellings, the exemption is split between you.
Divorce and the main residence rules.
When a property settlement occurs between spouses and if the conditions are met, the marriage breakdown rollover rules apply to ignore any CGT gain on the property settlement.
If the home qualified for the main residence exemption for only part of the ownership period for either individual, then a partial exemption might be available. That is, the spouse receiving the property may need to pay CGT on the gain on their share of the property received as part of the property settlement when they eventually sell the property.
Have you inherited property?
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.
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 you would like to have a confidential discussion with Alan or Robert please email us on info@fluxadvisors.com.au