The main residence exemption exempts your family home from capital gains tax (CGT) when you dispose of it. But, like all things involving tax, it’s never that simple.
As the character of Darryl Kerrigan in The Castle said, “it’s not a house. It’s a home,” and the Australian Taxation Office’s (ATO) interpretation of a main residence is not fundamentally different. A home is generally considered to be your main residence if:
- It’s where you and your family live
- Your personal belongings have been moved into the dwelling
- It is where your mail is delivered
- It’s your address on the electoral roll
- You have connected services such as telephone, gas and electricity (in your name); and
- It is your intention for the home to be your main residence.
The length of time you have lived in the home is important, but there are no hard and fast rules. Your intention takes precedence over time spent as every situation is different.
When does the main residence exemption apply?
In general, CGT applies to the sale of your home unless you have an exemption, partial exemption, or you can offset the tax against a capital loss.
If you are an Australian resident for tax purposes, you can access the full main residence exemption when you sell your home if:
- Your home was your main residence for the whole time you owned it (see Can the main residence apply if you move out?)
- You did not use your home to produce any income (see Partial exemption below)
- The land your home is on is 2 hectares or less. If your home is on more than 2 hectares, for example on farmland, the exemption can apply to the home and up to 2 hectares of adjacent land.
Partial exemption
If you have used your home to produce income, you won’t normally be able to claim the full main residence exemption, but you might be able to claim a partial exemption.
Common scenarios impacting your main residence exemption include:
- Running a business from home (working from home is ok), and
- Renting the home or part of the home.
In these scenarios, from the time you started to use the home to generate income, that part of the home is likely to be subject to CGT. And, a word of caution here, as of 1 July 2023, platforms such as Airbnb must report all transactions to the ATO every 6 months. This data will be used to match against the income reported on income tax returns.
Foreign residents and changing residency
Foreign residents are generally ineligible for the main residence exemption on property sales in Australia, even if they were tax residents for a portion of the ownership period. If you sell a property while classified as a non-resident for tax purposes, you cannot claim the main residence exemption. However, if you reassume tax residency in Australia before selling and meet other criteria, you might be able to claim the exemption. Note that tax residency differs from visa status, and the rules can be complex. If you’re unsure of your status or eligibility, it’s advisable to consult with a tax professional to navigate these rules accurately.
Can the main residence apply if you move out?
You might have heard about the ‘absence rule’. This rule allows you to continue to treat your home as your main residence for tax purposes:
- For up to 6 years if the home is used to produce income, for example you rent it out while you are away; or
- Indefinitely if it is not used to produce income.
When you use the absence rule on your primary residence, you typically can’t apply the main residence exemption to another property for the same period, making that second property subject to capital gains tax (CGT) unless certain exceptions apply.
For example, imagine you moved overseas in 2020 and rented out your Australian home while away. Upon returning in 2023, you move back into this home. If you sell it in early 2024 after deciding it isn’t your “forever home,” and you’ve opted for the absence rule during your time abroad—while not treating any other property as your main residence—you should be eligible for the full main residence exemption, provided you’re a tax resident at the time of sale.
Moreover, if you reoccupy the property as your main residence after an absence and later move out, the 6-year exemption period resets. Thus, if your home was rented out for no more than six years during each absence, you likely qualify for the full exemption, assuming all other criteria are met.
Timing
Your home is generally considered your main residence from when you start living in it. However, if you move in soon after the settlement date, it’s recognized as your main residence from the acquisition date.
If you purchase a new home but haven’t sold your old one, both can be treated as your main residence for up to six months if certain conditions are met: the old home was your main residence for at least three continuous months within the 12 months prior to its sale, and it wasn’t used to generate income during any period it wasn’t your main residence.
Should selling the old home take longer than six months, the main residence exemption could still apply to both homes but only for the six months preceding the sale of the old home. Before this period, you might have to choose which home should be treated as your main residence, as the other will be subject to capital gains tax (CGT).
If the new home is rented out when you purchase it, it doesn’t become your main residence until you move in. If unforeseen circumstances prevent you from moving in immediately—like a hospital stay or an overseas work assignment—you might still qualify for the main residence exemption from when you acquired the home, provided you move in as soon as possible after the issue is resolved. Documentation to support such situations is essential, as mere inconvenience won’t suffice.
Can a couple have a main residence each?
Let’s say you and your spouse each own homes that you have separately established as your main residences.
The rules don’t allow you to claim the full CGT exemption on both homes. Instead, you can:
- Choose one of the dwellings as the main residence for both of you during the period; or
- Nominate different dwellings as your main residence for the period.
If you and your spouse nominate different dwellings, the exemption is split between you:
- If you own 50% or less of the residence chosen as your main residence, the dwelling is taken to be your main residence for that period and you will qualify for the main residence exemption for your ownership interest;
- If you own greater than 50% of the residence chosen as your main residence, the dwelling is taken to be your main residence for half of the period that you and your spouse had different homes.
The same rule applies to your spouse.
The rule applies to each home that the spouses own regardless of how the homes are held legally, i.e., sole ownership, tenants in common or joint tenants.
What happens in a divorce?
In scenarios where a home is transferred between spouses—assuming it’s not involving a trust or company and both parties solely used the home as their main residence throughout their ownership—the property is typically eligible for a full main residence exemption when sold.
However, if the main residence exemption only applies for part of their ownership period for either spouse, a partial exemption may come into play. The spouse who receives the property as part of a property settlement might be required to pay capital gains tax (CGT) on their share of any gain when the property is sold.
While the main residence exemption might seem straightforward, its application can quickly become intricate. To effectively navigate these waters, relying solely on intuition or a general feel, as humorously suggested by Dennis Denuto in The Castle with his reference to “the vibe,” is insufficient. Concrete understanding and evidence are crucial to ensure compliance and optimal tax treatment.
