Generally, a taxpayer’s main residence will be exempt from Capital Gains Tax (CGT). However, there are some circumstances where only a partial exemption may be available.
Main residence for part of ownership period
Only a partial main residence exemption is available for a dwelling if it was the taxpayer’s main residence for only part of the ownership period.
Generally, the full exemption is proportionately reduced by reference to the period for which the dwelling was not the taxpayer’s main residence (non-main residence days).
The taxable capital gain is calculated as follows:
Total capital gain x (Non-main residence days/Total ownership days)
Tom acquired a dwelling on 20 October 2003 which he rented out until 21 October 2006, from which date he used the dwelling as his main residence.
Tom eventually sold the dwelling on 9 September 2008 and made a total capital gain of $100,000.
The capital gain is reduced pro-rata by reference to the period Tom used the dwelling as his main residence.
The reduced capital gain is calculated as follows:
= Total capital gain x (Non-main residence days/Total ownership days)
= $10,000 x (1,098/1,787)
The CGT discount may then be applied to further reduce the gain.
Main residence used for income-producing purposes
Only a partial main residence exemption is available in respect of a capital gain arising from the disposal of a dwelling:
- if the taxpayer used part of the dwelling to produce income at some time during the ownership period, and
- if interest had been incurred on money borrowed to acquire the dwelling, it would be deductible.1
To work out the taxable capital gain, the taxpayer should apply the same process for proportioning the capital gain or loss as they would for claiming a deduction for interest.
In most cases, the taxpayer can use both the:
- proportion of the floor area of the dwelling that is set aside to produce income, and
- period which the taxpayer used it for this purpose.
Rachel bought her home on 1 January 1999 and sold it on 31 December 2009. It was her main residence for the entire 11 years.
From the time she bought it until 30 June 2004 (5 years and 6 months – approximately 50% of the ownership period), Rachel used part of the home to operate her graphic design business. The rooms represented 25% of the total floor area of the home.
When she sold the home, Rachel made a capital gain of $80,000. The taxable portion is calculated as follows: $80,000 x 25%2 x 50%3 = $10,000.
The CGT discount, in this example, may then be applied to further reduce that gain.
The 'home first used to produce income' rule (below) does not apply because Rachel used the home to produce income from the date she purchased it.
When a taxpayer first uses their home to produce income after 20 August 1996
If a taxpayer starts to use their home to produce income for the first time after 20 August 1996, there is a special rule for working out the taxpayer’s capital gain or loss.
In this case, the taxpayer is taken to have acquired their home at its market value at the time it is first used to produce income, if all of the following apply:
- the taxpayer acquired the dwelling on or after 20 September 1985
- the taxpayer first used it to produce income after 20 August 1996
- the taxpayer would only get a partial exemption because the dwelling was used to produce assessable income during the ownership period, and
- the taxpayer would have been entitled to a full exemption if they had sold the home immediately before they first used it to produce income.
Louise purchased a home in December 1991 for $200,000. The home was her main residence. On 1 November 2007, she started to use 50% of the home for a consultancy business. At the time the market value of the house was $320,000.
She decided to sell the property in August 2008 for $350,000. The capital gain can be calculated:
50% x ($350,000 - $320,000) = $15,000
Louise is taken to have acquired the property on 1 November 2007 at a cost of $320,000.
Accordingly, she is taken to have owned it for less than 12 months and as such Louise is not entitled to the CGT discount in calculating her capital gain.
Renting out the principal residence
A taxpayer may continue to treat their home as their principal residence where they are absent from the home.
Where a taxpayer chooses to rent out their home, they may still be entitled to the full main residence CGT exemption - that is, the six year rule may apply – rather than a partial exemption.
If a choice is made to apply the six year rule and any gain is fully exempt, the ‘home first use to produce income’ rule (above) does not apply.
See Macquarie Fastfacts: An overview of the main residence CGT exemption for further details.