Your family home is exempt from capital gains tax when you sell it. A home is referred to as your main residence if:
- you and your family live in it
- your belongings have been shifted into the dwelling
- this is a place where your mail is delivered
- this is your address on the electoral roll
- you’ve connected services such as gas, telephone and electricity in your name
- you want your home to be your main residence.
When Does the Main Residence Exemption Apply?
In general, Capital Gains Tax (CGT) applies to the sale of your home unless you qualify for an exemption, or partial exemption, or can offset the tax against a capital loss. As an Australian resident for tax purposes, you may be eligible for the full main residence exemption when you dispose of your home if:
- Your home was your primary residence when you owned it.
- You didn’t use your home to generate any income.
- The land your home is built on is 2 hectares or less. If your home is built on above 2 hectares, the exemption can apply to the home and up to 2 hectares of adjacent land.
Partial Exemption
If you’ve used your home to generate income, you won’t qualify for the full main residence exemption, but you may be able to claim a partial exemption.
Common cases affecting your main residence exemption include:
- working from home
- renting the home or portion of the home.
In these cases, when you started using the home to produce income, that portion of the home was liable to CGT. And, from 1 July 2023, platforms such as Airbnb are required to report all transactions to the ATO every 6 months. It will match the income reported on income tax returns.
Foreign Residents and Changing Residency
Foreign residents are not eligible for accessing the main residence exemption even if they were residents for part of the time they owned the property. If you are a non-resident when you enter into the contract to dispose of the property, you can’t access the main residence exemption. On the other hand, if you are a resident when you sell and you meet the other eligibility requirements, the rules must apply as normal even if you were a non-resident for a part of the time you owned the property.
Can the Main Residence Apply If You Move Out?
The absence rule allows you to continue to use your home as your main residence for tax purposes:
- for up to 6 years if the home is treated to generate income, or
- indefinitely if it is not used to generate income.
The absence rule won’t allow you to apply the main residence exemption to any other property you own over the same time period. If you re-establish the property as your main residence again and later you stop living there, the 6-year period also resets. If the time the home was income generating is limited to 6 years for each absence, the full main residence exemption will be available if the other eligibility requirements are satisfied.
Timing
Your home qualifies as your main residence when you start living there. However, if you live there after the settlement date of the contract, that home is treated as your main residence when you obtain it. If you purchase a new home but haven’t sold your old home yet, you can use both properties as your main residence for up to 6 months without affecting your eligibility for the main residence exemption. It applies if the old home was treated as your main residence for a continuous period of 3 months in the 12 months before you sold it and you did not use your old home to generate income in any part of that 12 months when it was not your main residence.
If the sale takes more than 6 months and if qualifies, the main residence exemption could apply to both homes only for the last 6 months before disposing of the old home. For any time period prior to this, it could be possible to choose which home is considered your main residence.
If your new home is being rented to someone when you buy it and you can’t live there, the home is not treated as your main residence until you live there. However, you may still be able to claim the main residence exemption from the time you obtained the home if you move in once the issue has been resolved which might prevent you from living there.
Can a Couple Have a Main Residence Each?
For instance, you and your partner each own homes that you have built separately as your main residence. The rules won’t allow you to apply for the full CGT exemption on both homes. Instead, you can:
- choose one of the homes as the main residence for both of you during the period, or
- nominate a different home as your main residence for the period.
If you and your partner nominate different homes, the exemption is split between you:
- If you own 50% or less of the residence that you chose as your main residence, the dwelling is treated as your main residence for that period and you will be eligible for the main residence exemption for your ownership interest.
- If you own more than 50% of the residence that you chose as your main residence, the dwelling is treated as your main residence for half of the period that you and your partner had different homes.
The same rule applies to your spouse. The rule applies to each home that the spouses own irrespective of how the homes are held legally, i.e., sole ownership, tenants in common or joint tenants.
What Happens in a Divorce?
Suppose the home is transferred to one of the spouses, both individuals used the home as their main residence over their ownership time period, and the other eligibility requirements are satisfied, then a full main residence exemption must be available when the property is sold.
If the home was eligible for the main residence exemption for only part of the ownership time period for either individual then a partial exemption might apply. That is, the partner receiving the property may have to pay CGT on the gain on their share of the property received as part of the settlement of the property when they dispose of the property.
Earned an Income from the Sharing Economy?
It is crucial to declare income earned from sharing economy platforms such as Airbnb, Stayz, Uber, etc., in your tax return. Since 1 July 2023, the platforms delivering ride sourcing, short-term accommodation and taxi travel, must report transactions made through their platform to the ATO. The ATO will have taxpayers’ income tax returns to compare this data in 2023-24. All other sharing economy platforms must report from 1 July 2024.