What is the 'main residence exemption'?
Generally, a property, including a taxpayer's main residence, ie their family home, is considered to be a Capital Gains Tax (CGT) asset. When CGT assets are sold, taxpayers may be liable to pay tax on all, or part, of the capital gain. However, tax law provides an exemption for a dwelling that is the taxpayer's main residence, where certain criteria are satisfied. This exemption means there will generally be no tax liability for the taxpayer upon the sale of the main residence.
To be eligible for the main residence exemption, the following conditions must be satisfied:
- the taxpayer is an individual
- the taxpayer is an Australian tax resident
- the dwelling was the taxpayer's main residence throughout the 'ownership period', and
- the dwelling was not transferred to the taxpayer as a beneficiary in, or as the trustee of, a deceased estate.
Is a dwelling a main residence?
A number of factors are taken into consideration when determining whether or not a dwelling is the taxpayer's main residence, including:
- the length of time the taxpayer has lived in the dwelling
- the place of residence of the taxpayer's family
- whether the taxpayer's personal belongings are located at the residence
- the taxpayer's address on the electoral roll
- the address to which the taxpayer's mail is delivered
- the connection of gas, telephone or electricity services
- the taxpayer's intention in occupying the dwelling
It is important to note that a mere intention to live in a dwelling as your main residence, without actually doing so, is insufficient to be eligible for the exemption – the taxpayer must actually occupy the dwelling.
What happens if there is a delay in the taxpayer moving into the main residence?
In some cases, there may be a gap between when a taxpayer purchases a dwelling that is intended to be their main residence and when they actually occupy the property.
In this instance, the main residence exemption will apply from the date of ownership provided that the dwelling was occupied by the time it was first practicable to do so. Generally, this would be the settlement date of the purchase contract.
A taxpayer may not be able to move into the dwelling upon settlement due to illness or some other unforeseen reason. So long as the taxpayer occupies the dwelling as soon as the cause of the delay no longer exists (eg recovery from illness) then the exemption will most likely still be available from the date the taxpayer acquired ownership.
Note that delaying occupancy due to an existing tenant is not sufficient grounds, and as such, the exemption would not apply from the date of ownership.
Can a taxpayer have more than one main residence?
Where a taxpayer acquires a dwelling that is to become the main residence whilst at the same time still owning an existing main residence, the taxpayer is allowed to treat both dwellings as their main residence for the shorter of:
- six months, or
- the period between the acquisition of the new residence and disposal of the existing residence.
This exemption on both dwellings will only apply if:
- the old dwelling was the taxpayer's main residence for a continuous period of at least three months in the 12 months before it was disposed of
- the taxpayer did not use the old dwelling for income-producing purposes in any part of that 12 months when it was not the main residence, and
- the new dwelling becomes the taxpayer’s main residence.
If it takes longer than six months to dispose of the old dwelling, the taxpayer may choose to treat it as the main residence in order to obtain a full exemption on this dwelling. This however may impact on the taxpayer’s ability to receive the full exemption on the new main residence when that dwelling is disposed of at some point in the future.
What happens when a taxpayer is absent from their main residence?
Where a main residence is vacated and not rented out (and no other main residence election is made in respect of another property), the property will maintain its exemption status indefinitely.
Where the dwelling is used to produce assessable income when the taxpayer is absent (for example, is rented out), the exemption will apply for a period of up to six years. If the dwelling is re-established as the taxpayer's main residence, another maximum period of six years applies if the dwelling is again vacated. The taxpayer can only continue to apply the main residence exemption to the vacated property where no other dwelling is treated as a main residence during the period of absence.
Emily has lived in her own house for two years. She is posted overseas for four years, during which period she rents the house. On her return, she lives in the house for two years and is then posted overseas for a further five years. Again, she rents out her house. On her return she sells the house.
Emily can choose to treat her house as her main residence during both periods of absence because each absence is less than six years. She can do this by not including any capital gain or loss in her income tax return for the year in which the house is sold.
If any part of the dwelling was used to produce assessable income (such as a home office) before the taxpayer vacated it, the taxpayer cannot apply the six year rule to that part of the dwelling. (For information on the impact of using part of the home to produce income, see Macquarie Fastfacts: Partial Main residence CGT exemption.)
What if a taxpayer and their spouse have different residences?
Only one full main residence is permitted per family. In instances where a couple has more than one dwelling they must choose one of the properties as their main residence.
Where separate dwellings are maintained and both are elected as main residences (one by the taxpayer and the other by the taxpayer’s spouse), special rules will apply and the exemption will be split. This is typically based on the ownership percentages, to determine the extent of the exemption for each dwelling.