Is Your Family Home Really Tax-Free?
The main residence exemption means your family home is usually exempt from capital gains tax (CGT) when you sell it. But, as with most tax matters, it’s not always straightforward. As Darryl Kerrigan in "The Castle" said, “it’s not a house. It’s a home,” and the Australian Taxation Office’s (ATO) interpretation aligns with this sentiment.
Your home is generally considered your main residence if:
- It's where you and your family live
- Your personal belongings are there
- It’s where your mail is delivered
- It’s your address on the electoral roll
- Services like telephone, gas, and electricity are connected in your name
- You intend for it to be your main residence
The time you've lived in the home matters, but your intention is even more crucial. Every situation is different.
When Does the Main Residence Exemption Apply?
Generally, 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. As an Australian resident for tax purposes, you can get the full main residence exemption if:
- Your home was your main residence for the entire time you owned it (see Can the main residence apply if you move out?).
- You didn’t use your home to produce any income (see Partial exemption below).
- The land your home is on is 2 hectares or less.
Partial Exemption
If you've used your home to produce income, you may not get the full exemption but might qualify for a partial exemption. Common scenarios include:
- Running a business from home (working from home is okay).
- Renting out the home or part of it.
From the time you start using the home to generate income, that part of the home is likely subject to CGT. As of 1 July 2023, platforms like Airbnb must report all transactions to the ATO every six months, which will be matched against reported income on tax returns.
Foreign Residents and Changing Residency
Foreign residents can’t access the main residence exemption, even if they were residents for part of the time they owned the property. If you’re a non-resident at the time you sell, you likely can’t access the exemption. Conversely, if you’re a resident at the time of sale and meet the other criteria, the rules should apply normally.
Can the Main Residence Exemption Apply if You Move Out?
The ‘absence rule’ allows you to treat your home as your main residence for tax purposes:
- For up to 6 years if the home is used to produce income.
- Indefinitely if it’s not used to produce income.
This rule usually prevents you from applying the main residence exemption to any other property you own during that time. For example, if you moved overseas in 2020, rented out your home, returned to Australia in 2023, and sold your home in early 2024, you could access the full main residence exemption if you elected to apply the absence rule and didn’t treat any other property as your main residence.
The 6-year period resets if you re-establish the property as your main residence and then stop living there again. This means if the home was income-producing for no more than six years per absence, the full main residence exemption is likely available if the other criteria are met.
Timing
Your home usually qualifies as your main residence from the time you move in. If you move in as soon as possible after the settlement date, it’s considered your main residence from the time you acquired it.
If you buy a new home but haven’t sold your old one, you can treat both as your main residence for up to six months. This applies if the old home was your main residence for at least 3 months in the 12 months before selling it and wasn’t used to produce income during that time. If the sale takes more than six months, the exemption could apply to both homes only for the last six months prior to selling the old one.
Can a Couple Have a Main Residence Each?
If you and your spouse each own homes established as main residences, you can’t claim the full CGT exemption on both. You can:
- Choose one home as the main residence for both of you.
- Nominate different homes as your main residences.
If you nominate different homes, the exemption is split:
- If you own 50% or less of the chosen residence, it’s taken as your main residence for that period.
- If you own more than 50%, it’s taken as your main residence for half the period both homes were separately owned.
What Happens in a Divorce?
If the home is transferred to one spouse and both used it solely as their main residence, a full exemption should be available when sold. If it qualified for the exemption for only part of the ownership period, a partial exemption might apply.
Conclusion
The main residence exemption can get complex. You’ll need more than just a “vibe” to navigate it successfully.