Many people own a main residence but are unaware that Capital Gains Tax (CGT) applies when or if they sell their home.
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.
Read below to find out what the main residence exemption is and how it it is affected by your individual circumstances.
What is the main residence exemption?
Your main residence is the home you live in. CGT usually applies if you sell your home, unless you have an exemption, partial exemption, or you are able to offset the tax against a capital loss (reduce the tax you pay).
If you are an Australian resident for tax purposes, you can access the 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
- You did not use your home to produce an income – running a business from your home or renting it out
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.
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. This applies if:
- You were living in your old home for a continuous period of 3 months within the 12 months before you sold 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
- Your new property becomes your main residence.
If you cannot move in for some unforeseen reason, then you still might be able to access the main residence exemption from the time you acquired the home, only if you move in as soon as 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
Can I treat my home as my main residence even if I don’t live there?
If you have established your home as your main residence but no longer live there, you may still be able to get the exemption. 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.
By applying 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.
What happens if I have been running my business from home?
If your home is also set aside as a dedicated place of business (i.e., you do not have another office or workshop), then you might only be able to claim a partial main residence exemption. This is because income producing assets are excluded from the 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. These rules apply even if you have not claimed these expenses as a deduction.
Note: The ATO has confirmed that all that time working from home temporarily during the pandemic should not impact your ability to access the main residence exemption.
Can I have a different main residence to my spouse?
If you and your spouse each own homes that you have separately established as your main residences for the same period, you will not be able 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:
- If you own 50% or less of the residence chosen as your main residence, the dwelling is taken to be your main residence for that period and you will qualify for the main residence exemption for your ownership interest;
- If you own greater than 50% of the residence chosen as your main residence, the dwelling is taken to be your main residence for half of the period that you and your spouse had different homes.
I have inherited a property. If I sell it, do I have to pay CGT?
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 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.
For more on the main residence exemption, click here!
For advice on Capital Gains, contact your Aintree Group advisor today!