For many of us, the decision to sell a property is an important one, especially if it’s our main residence. Accordingly, it is vital to be aware of the relevant Capital Gains Tax (CGT) implications and exemptions when selling your main residence.
What is considered a Main Residence?
A property is generally considered to be your main residence if:
- you and your family reside in it
- your personal belongings are in it
- it’s the address your mail is delivered to
- it’s your address on the electoral roll
- services such as gas and power are connected
CGT Total Exemptions
As an Australian tax resident, if you sell a property that you live in and have elected to be your main residence, generally the entire sale of that property is exempt from capital gains tax. In addition to this, the dwelling is required to be on a property size of two hectares or less.
In a situation where you have moved out of the property, (for instance, to go and work in a different state or to move back in with family members) generally you can continue to treat the dwelling as your main residence for:
- up to six years if it is used to produce income or
- indefinitely if it is not used to produce income.
This is provided you are not treating any other dwelling as your main residence. If this criteria has been met, the full exemption applies and your capital gain or loss is disregarded – you don’t pay tax on any capital gain, but nor can you use any capital loss to reduce your assessable income.
Note: The main residence exemption is not available for vacant blocks of land.
It is also important to consider that the main residence exemption rules for those who are ‘non residents for tax purposes’ are proposed to change – Tammy Tieu has addressed this in her blog ‘Selling your Property as a Foreign Resident’. In a situation where the criteria for a full main residence exemption have not been met, a partial exemption may still be available.
CGT Partial Exemptions
It is common to see homeowners acquire a new property prior to disposing of their existing one. In this instance, both dwellings are treated as your main residence for up to six months if:
- you lived in your old home and it was your main residence for a continuous period of at least three months in the 12 months before you disposed of it
- you did not use it to produce assessable income (such as rent) in any part of that 12 months when it was not your main residence
- the new dwelling becomes your main residence
If you sell your old home within six months of acquiring the new one, the main residence exemption applies and entire capital gain is exempt. If it takes longer than six months to dispose of your old home, the period not covered by the six month main residence classification (above) forms the assessable portion of your capital gain. Accordingly, this means the capital gain is only partially exempt.
A partial main residence exemption is also available where a dwelling stops being your main residence and is used to produce income for more than six years during a ‘single period of absence’. In this instance, the partial main residence exemption is calculated by determining the number of days the property was your main residence over the entire ownership period of the property. This is considered the exempt portion of the capital gain. The remaining portion of the capital gain is assessable, and can be further reduced via the indexation method or discount method for calculating taxable capital gains (subject to meeting certain criteria).
There are also special rules to consider when working out the cost base of your main residence at the time it is first used to produce income (commonly referred to as the ‘first income producing rule’).
All in all, capital gains tax laws are complex; therefore it is recommended that you seek advice before selling to ensure that you are making the right decision for you. We have an experienced team at BLG Business Advisers who are happy to assist you. Take this opportunity to get in touch with us online or by calling (02) 4229 2211.