Typically, when you sell an asset you must pay capital gains tax (CGT) on any profit which you make on the sale.

For most of us, the most valuable asset which we own is our family home and with house prices heading upwards across large parts of the country, many of us stand to make a large profit if we sell.

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) which arises when a taxpayer sells their 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.

In this article, we look at what the phrase “main residence” actually means and look at some of the situations where the CGT exemption might not be available.

What is my Main Residence?

In short, it’s your home. 

The ATO has set out some of the factors which it looks for in determining whether the property you have disposed of is your main residence. These include:

  • Whether you and your family live there;
  • Whether you have moved your personal belongings into the home;
  • The address to which your mail is delivered;
  • Your address on the electoral roll
  • The connection of services and utilities (for example, phone, gas, or electricity);
  • Your intention in occupying 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, note that the CGT exemption normally only applies on land adjacent to the dwelling up to a maximum of two hectares.

The main residence exemption can only apply to a property which includes a dwelling, ie anything that is 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 that 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
  • 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.

Can I Earn Rental Income from 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 for up to six years and still get the exemption provided no other property becomes your main residence during the absence.

During that time you can earn rental income on the property and claim a tax deduction for expenditure as you would with a normal investment property. Providing you move back into the property before the end of the six year period and do not dispose of the property within the same financial year that the property was earning rental income you can still qualify for the full exemption.

Does the Main Residence Apply to Property Renovators?

Yes it does 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 generally tax exempt, even if you then move into another property and repeat the process. 

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 that property owners who spend an extended period in hospital, must relocate to a residential care facility, or who relocate to live with a care giver, can still access the main residence exemption when they sell the property to pay living and medical expenses.

For more information, book an appointment with H&R Block.