Property tax tips: capital gains tax (CGT) – main residence exemption
The concept of your ‘main’ or ‘principal’ residence is an important one due to its significant influence on your future financial situation. When it comes time to sell your home, it is one of the few windfalls you can receive (assuming you make a profit when you sell) that is not subject to tax. Your main residence is exempt from tax on any capital gains provided it meets a few criteria.
For most people, figuring out what is your main residence is pretty straightforward.But for others, it is not so simple due to their circumstances. In some cases, you may even have a choice as to what property you claim. For these situations it’s important to understand a few key rules:
It must be a dwelling
A dwelling is considered a building or part of a building consisting mainly of residential accommodation with land under the accommodation. Therefore it could be a caravan or mobile home, but cannot be vacant land.
You must reside in the property
Definitions are not explained in the tax legislation, however the Australian Tax Office (ATO) has listed a number of factors that are taken into account to determine whether they would allow your claim for main residence exemption. These include:
- Length of time you lived in the property (it’s often assumed this should be at least 3 months but it’s not stipulated by law)
- Where the rest of your immediate family live
- Whether you keep your personal belongings at the property
- The address where your mail is actually delivered
- Whether your address on the electoral roll matches that of the property
- Connection of services such as gas, telephone and electricity
- Your intention of occupying the premises
One main residence at a time
You can only claim one residence as your ‘main’ residence at any one time. However, you are allowed a six-month overlap of main residences when you are changing homes (between the time of acquisition of the new and disposal of the old).
If you choose to move elsewhere and rent out your home at some stage, you can continue to claim the main residence status on the property for up to 6 years even though you don’t actually live there. This will not impact on your ability to claim deductions on your now investment property, it will only impact on CGT. The catch is that you will not be able to claim the other property you are now living in as your main residence during this time, if you claim your former home as your main residence.
There are times when a property can only receive a partial exemption. One of those is when you move house, your new home becomes your main residence, and you then rent out your old home.During the time in which your old property is rented and no longer considered your main residence, it will be subject to CGT. However CGT will not be calculated during the period you lived there and claimed it as your main residence. The other time your main residence will receive a partial exemption is when a part of it is used for business and other such income producing purposes (e.g. a beautician servicing customers in a spare bedroom). In these circumstances, the proportion of the dwelling used for such purposes will be subject to CGT for that period, while the rest of the dwelling will continue to be exempt. This area can be tricky to interpret so do seek professional advice if you have concerns.
If you are building a home on vacant land or substantially renovating a property and therefore cannot live at the property, you can still claim main residency in both examples under a “pre-occupation exemption”. Under this exemption you can treat the property as your main residence for up to 4 years before you actually occupy it provided you occupy it as soon as practicable and live there for at least 3 months after doing so. Naturally, you must not claim any other property as your main residence during this time.
Property in individual names
With a few minor exemptions, property can only be claimed as a main residence if held in individual names. Property held in a company or trust therefore can not claim the CGT break. Because of this significant tax implication, most people hold their home in their personal names. If asset protection is an issue, best to consider holding it in just one partner’s name which still allows you to access the CGT benefits while affording some asset protection.
Taxation is not always a straightforward area and many rules are subject to interpretation so I encourage you to seek professional advice from your accountant if you have any questions or concerns.