Typically, when you sell an asset you must pay capital gains tax (CGT) on any profit made on the sale. For most of us, the most valuable asset we own is our family home . So, does that mean that you have to pay CGT when you sell your house?
Fortunately, in most cases, the answer is no. The tax law provides an automatic exemption for any capital gain (or loss) that arises from the sale of a taxpayer's main residence. However, this isn't a blanket exemption. There remain situations where some or all of the gain arising on disposal of your main residence may be liable for CGT.
WHAT IS MY MAIN RESIDENCE?
In short, it's your home. The ATO has set out some of the factors that determine whether the property you have disposed of is your main residence. These include whether:
- You and your family live there
- You have moved your personal belongings into the home
- This is the address to which your mail is delivered
- This is your address on the electoral roll
- The property is connected to services and utilities (for example, phone, gas, or electricity)
- You actually occupy the dwelling.
There is no minimum time that you have to live in a home before it can be considered to be your main residence. Even if you only own a house for a short period – six months, say – provided you tick all the boxes above, the property will be your main residence.
If you live on a large block, the CGT exemption normally only applies to the house and land (including the land on which the house sits) up to a maximum of two hectares. The main residence exemption also only applies to a property that includes a dwelling, which is anything used wholly or mainly for residential accommodation.
Examples of a dwelling are:
- A house or cottage
- An apartment or flat
- A strata title unit
- A unit in a retirement village
- A caravan, houseboat or other mobile home.
Simply owning land isn't enough to claim the exemption, even if you intend to build a dwelling at a later date. However, you can choose to treat land as your main residence for up to four years before a dwelling is constructed in certain circumstances. You can choose to have this exemption apply if you acquire land and you:
- Build a dwelling on the land
- Repair or renovate an existing dwelling on the land, or
- Finish a partly constructed dwelling on the land.
There are a number of conditions you must satisfy before you can claim the exemption. You must first finish building, repairing or renovating the dwelling and then:
- Move into the dwelling as soon as practicable after it is finished, and
- Continue to live in the dwelling as your main residence for at least three months after it becomes your main residence.
CAN I HAVE MORE THAN ONE MAIN RESIDENCE?
You can only ever have one main residence at any given point in time. The exception is if you're selling your old property and buying another. In this case you're entitled to an overlap period of six months when both properties can be your main residence as long as:
- The new property will be your main residence after the sale of the old property
- You lived in the old property for at least three continuous months in the 12 months prior to sale, and
- The property wasn't used to generate rental income in any part of the 12 month period that it wasn't your main residence.
WHAT IF I CAN NO LONGER LIVE IN MY MAIN RESIDENCE?
The main residence exemption can also apply where the owner is no longer able to reside in the dwelling, because they have lost the ability to live independently and require full time care. This ensures property owners who spend an extended period in hospital, or must relocate to a residential care facility, or who relocate to live with a caregiver, can still access the main residence exemption when they sell the property to pay living and medical expenses.
CAN I VACATE THE PROPERTY AND STILL CLAIM IT AS MY MAIN RESIDENCE?
You do not need to live in the dwelling for the entire period of ownership for it to continue to qualify for the exemption.
If you own a property which is currently your main residence you can move out of the property and still get the exemption provided no other property becomes your main residence during the absence. If you earn income from the property (for instance by renting it), this exemption lasts six years. If you don't earn income from the property, the exemption is indefinite.
DOES THE MAIN RESIDENCE APPLY TO PROPERTY RENOVATORS?
Possibly – provided you actually occupy the renovated property as your main residence, even if only for a short period.
If you purchase a property, occupy the dwelling while you are renovating it and then sell the property, any profit you make on the sale of the property is may be tax exempt, although if you habitually repeat this ( "house-flipping"), the ATO may argue that you are actually a property developer and tax you on your profits as business income..
CAN FOREIGN RESIDENTS CLAIM THE MAIN RESIDENCE EXEMPTION?
Most individuals who are non-residents for tax purposes at the time they sell their home (ie the date they sign the sale contract, not the date of settlement), will no longer qualify for the main residence exemption from 1 July 2020.
The main residence exemption may however still be available for taxpayers who have been non-residents for tax purposes for a continuous period of six years or less when the house is sold, if certain "life events" happened.
The "life events" referred to are:
- The taxpayer, the taxpayer's spouse or child under 18 had a terminal medical condition (ie two medical practitioners certiï¬ed that the illness will likely result in death within 24 months of this certiï¬cation)
- taxpayer's spouse or child under 18 dies, or
- The sale of the home involved the distribution of assets between the taxpayer and the taxpayer's spouse as a result of divorce, separation, or similar maintenance agreements. For example, if the taxpayer has been a non-resident for six years or less when they sell their home and the sale happened because of a court order under the Family Law Act 1975 (arising from a divorce), the taxpayer would still qualify for the main residence exemption.
There are no partial exemptions. Where a taxpayer has lived in their home as a main residence for a long time and has subsequently become non-resident before they sell their home, the taxpayer would not qualify for any main residence exemption at all. This is a very harsh outcome.
Where an individual returns to Australia and resumes Australian tax residency before entering into a contract of sale, they can still claim the main residence exemption. The period they spent overseas as a non-resident is completely overlooked.
DOES IT MATTER IF I HAVE USED MY HOME TO EARN INCOME?
Some people use their home to produce income, either by renting out part of the property, or by running a business from home. If you tick one of those boxes, you may be forsaking part of your CGT exemption. This is because you can't typically obtain a full main residence exemption if you used any part of your home to produce income during all or part of the period you owned it.
People who simply work from home as part of their job (such as teachers who might do some marking in the evening or anyone else who might do a bit of overtime away from the office) are not affected.
If you are impacted by the exemption, either you or your accountant will need to calculate how much of the profit on disposal of your house is taxable. In most cases, this is the proportion of the floor area of the home that is set aside to produce income and takes into account the period the home was used to produce income.
Here are some simple case studies to understand exactly how this works:
RUNNING A SMALL BUSINESS
Greg runs an IT consultancy from home as a sole trader, in addition to his day job working in IT for a major corporation. He undertakes projects working largely in the evenings and at weekends and converts a spare bedroom in his three bedroom house into an office where he runs his business.
He bought his house in 2006 for $500,000 and sells it in 2016 for $1,000,000. He estimates that approximately 10% of the floor area of the house is used in his home-based business. He commenced the business in 2011.
Ordinarily, the $500,000 profit on sale of his house will be exempt from CGT. However, for five years of the ownership period, he used 10% of the property to earn assessable income. This means that $500,000 x 10% x 50% of the gain ($25,000) will be taxable.
RENTING A ROOM THROUGH AIRBNB
Jill bought a three-bedroom apartment in Sydney in 2010 for $400,000. To help pay the bills, in 2014, she rented out one of the bedrooms through Airbnb. She estimates that including access to shared areas like the lounge and kitchen, 40% of the floor area is given over to earning assessable income through Airbnb. In 2016, she sells the apartment for $800,000.
Ordinarily, the $400,000 profit on sale of the apartment will be exempt from CGT. However for two years out of the six-year ownership period, she used 40% of the property to earn assessable income. This means that $400,000 x 40% x 33% of the gain ($52,800) of the gain will be taxable.
RENTING OUT THE WHOLE HOUSE WHILST TEMPORARILY WORKING AWAY FROM HOME
Bob bought a house in Perth for $500,000 in 2005. In 2012, he was employed to work in the mines in a remote area of Western Australia. He was provided with rental accommodation in that remote area by his employer. Whilst away, he rented out his whole house in Perth. In 2016, he sold the house for $1,000,000.
Ordinarily, the $500,000 profit on sale of the house will be exempt from CGT and that is indeed the case here. Tax law allows you live away from your home and earn assessable income from renting it out for up to six years (the six-year absence rule) without losing the main residence exemption, provided you don't acquire another main residence in the meantime. As Bob lived in rented accommodation whilst absent, he can take advantage of the six-year rule and claim a full exemption from CGT on the sale.
Vicki acquired a dwelling on 10 September 2010 moving into it and establishing it as her main residence. On 1 July 2018 Vicki vacated the dwelling and moved to New York. On 15 October 2020 Vicki signs a contract to sell the dwelling. As Vicki is a foreign resident on 15 October 2020, she is not entitled to the main residence exemption.
This outcome is not affected by Vicki previously using the dwelling as her main residence.
For more information, book an appointment with H&R Block.
Book an online appointment today
Our H&R Block accountants are now working online. Book an appointment with an expert.