Is Your Family Home Actually Tax Free?

The main residence exemption exempts your family home from Capital Gains Tax (CGT) when you dispose of it. But, like all things involving tax, it’s never that simple.

As the character of Darryl Kerrigan in The Castle said, ‘it’s not a house. It’s a home’, and the Australian Taxation Office’s (ATO) interpretation of a main residence is not fundamentally different. A home is generally considered to be your main residence if:

It’s Where You And Your Family Live.
You Have Moved Your Personal Belongings Into The Dwelling.
You Get Your Mail Delivered There.
It’s Your Address On The Electoral Roll.
You Have Connected Services Such As Telephone, Gas And Electricity (In Your Name); And
It Is Your Intention For The Home To Be Your Main Residence.

The length of time you have lived in the home is important, but there are no hard and fast rules. Your intention takes precedence over time spent as every situation is different.

When does the main residence exemption apply?

In general, CGT applies to the sale of your home unless you have:

An exemption;
Partial exemption; or
You can offset the tax against a capital loss.

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;
You did not use your home to produce any income; and
The land your home is on is 2 hectares or less. If your home is on more than 2 hectares, the exemption can apply to the home and up to 2 hectares of adjacent land.

Partial exemption:

If you have used your home to produce income, you won’t normally be able to claim the full main residence exemption. But you might be able to claim a partial exemption.

Common scenarios impacting your main residence exemption include:

Running a business from home, and
Renting the home or part of the home.

In these scenarios, from the time you started to use the home to generate income, that part of the home is likely to be subject to CGT. And a word of caution here, as of 1 July 2023, platforms such as Airbnb must report all transactions to the ATO every 6 months. The ATO will use this data to match against the income reported on income tax returns.

Foreign residents and changing residency.

If you’re a foreign resident, you can’t access the main residence exemption, even if you lived in the property as a resident for part of the ownership period.

If you’re a non-resident when you enter into the contract to sell the property, you likely can’t access the main residence exemption.

But if you’re a resident at the time of sale and meet the other eligibility criteria, the normal rules should apply. This is even if you were a non-resident for part of the ownership period.

For example, an expat who kept their main residence in Australia could return, become a tax resident again, and then sell the property. If they meet the criteria, they may still qualify for 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.

Can the main residence apply if you move out?

You might have heard about the ‘absence rule’. This rule allows you to continue to treat your home as your main residence for tax purposes:

For up to 6 years if the home is used to produce income, for example you rent it out while you are away; or
Indefinitely if it is not used to produce income.

When you apply the absence rule to your home, this normally 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 exposed to CGT.

Let’s say you moved overseas in 2020 and rented out your home while you were away. Then, you came back to Australia in 2023 and moved back into your house. Then in early 2024, you decided it is not your forever home and sold it. You elected to apply the absence rule to your home and didn’t treat any other property as your main residence during that same period. In this case, you should be able to access the full 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 again, but later stop living there. So, if you limit the period your home earns income to six years for each absence, you’ll likely qualify for the full main residence exemption. This is provided you meet the other eligibility criteria.

Timing

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 possible after the settlement date, you make the home your main residence from the time you acquired it.

If you buy a new home but haven’t yet sold your old home, you can treat both properties as your main residence. This is for up to six months without impacting your eligibility to 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 disposed of it. It also applies if you did not use your old home to produce income in any part of that 12 months when it was not 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 you rent your new home 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 don’t move in straight away due to unforeseen circumstances, like a hospital stay or an overseas work posting, you might still access the main residence exemption from the time you bought the home. You will move in as soon as it’s practical once the issue is resolved.

Ask ChatGPT. Inconvenience is not a valid reason and you will need to ensure that you have documentation to support your position.

Can a couple have a main residence each?

Let’s say you and your spouse each own homes that you have separately established as your main residences.

The rules don’t 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 as your main residences, you must split the exemption:

If you own 50% or less of the nominated residence, the home counts as your main residence for that period. You can also claim the exemption for your share.
If you own more than 50%, the home counts as your main residence for only half of the period when you and your spouse lived in separate homes.

The same rule applies to your spouse.

The rule applies to each home the spouses own, no matter how they hold the property, whether individually, as tenants in common, or as joint tenants.

What happens in a divorce?

Assume the home is transferred to one of the spouses (and not to or from a trust or company). Both individuals used the home solely as their main residence over their ownership period. The other eligibility conditions are met, then a full main residence exemption should be available when the property is eventually sold.

If the home only qualified for the main residence exemption for part of the ownership, a partial exemption may apply. The spouse who receives the property might need to pay CGT on their share when they eventually sell it.

The main residence exemption looks simple enough, but it can become complex quickly. You will need more than a ‘vibe’ to work with the exemption.

To learn more, please contact our Aintree Group Accounting team – we’re more than happy to help!

This is general advice only and has not been prepared with your situation and needs in mind. For individual and personalised advice, we highly recommend that you seek out proper professional advice from your accountant.