Main Residence capital gains tax Exemption
Have you thought about your intention in occupying the residence? This is because the mere intention to live in a dwelling as the main residence, without ever doing so, is insufficient for you to be eligible for the main residence capital gains tax exemption. As mentioned, for you to qualify for the exemption you must actually occupy the dwelling.
What Happens When There Are Delays in Moving into the Main Residence?
There are times when there is a gap between when you buy a dwelling you intend to be your main residence and the time you actually move in. You may not be able to move into the new dwelling due to illness or other unforeseen issues. In this situation, the main residence exemption will apply on the date of ownership if the house was occupied by the time it was realistic to do so. This is often the settlement date of the purchase contract.
When you buy a home and are yet to dispose/sell off your previous property, you can treat both dwellings as your main residence for up to 6 months. This is provided:
- Your previous home was your main residence for a continuous period of not less than 6 months in the past 12 months before disposing it.
- No assessable income was ever produced in the last 12 months when your previous residence was unoccupied.
- The new dwelling is your main residence.
If you are not able to sell your previous home within 6 months, you can work with an accountant in Sydney to help nominate it as your main residence and gain an exemption. This solution will only give you a partial exemption when you sell or dispose your new home.
Alternatively, you can nominate your new home as the main residence in order to claim the capital gains tax exemption. Both of your homes will be exempted for the final six months before selling the old dwelling. In this case, your old home will be partially exempted from capital gains tax.
Can You Have More than One Main Residence?
When you acquire a dwelling you intend to be your main residence while still owning an existing main residence, you are allowed to treat both as your main residence for a short period of 6 months or the period between you acquiring the new residence and disposing the old residence.
What Happens When You Are Absent from Your Main Residence?
When you vacate a main residence and don’t use it as a source of funds, the property will maintain its exemption status indefinitely. If the property is used to produce assessable income after you vacate, the exemption will apply for up to 6 years. When you reestablish the dwelling as your main residence, an additional period of 6 years will apply if the dwelling is vacated again. As a taxpayer, you are only allowed to apply the main residence exemption to a vacated property if you don’t have another dwelling that is being treated as your main residence during the period of your absence.
If any part of your dwelling was used to produce assessable income before you vacated, you cannot apply the 6-year rule to that part of your dwelling. For more information on the impact of using your home to produce income, you can consult a bookkeeping and accounting service provider in Australia.
What Happens if Your Spouse and Kids Live in a Different Home?
Only one full main residence is allowed per family. This means if your spouse and/or kids live in a different home for a period, you have to choose one of the homes to be your main residence for the period. You can also nominate the two homes as your main residence for that period.
Where separate dwellings are elected as main residences, special rules will apply and exemptions will be split. This is based on the ownership percentage. When you nominate two homes for the period and you own 50% or less of the nominated home, you will qualify for an exemption for the portion of the home. On the other hand, if you own more than 50% of the home, your share will be exempt for half the period you and your spouse or children have different homes.
Are You Eligible for the Main Residence CGT Exemption if Your Home Produces Income?
If your home is income producing, you will still be generally exempt from CGT. You will, however, not get a full main residence capital gains tax exemption. Other conditions you have to meet include:
- The property was acquired on or after 20th September 1985.
- You would be allowed a deduction for interest on money borrowed to acquire the dwelling. This is also known as the interest deductibility test.
The calculations are based on the part of your home’s floor area that is set aside to produce income and the period used to produce that income. This will also include the period the dwelling is available for rent such as the period between tenants. You can visit this ATO webpage for more information on how the calculation is done.
When you rent out part of your home, you are entitled to deduct part of the interest on the money you potentially borrowed to purchase the dwelling. Conversely, if you run a business in your home, you will be entitled to deduct part of the interest on the money you potentially borrowed to buy the dwelling if:
- A portion of the dwelling is used exclusively as a place of business and can be identified clearly
- A portion of the home is not readily adaptable for private use such as dentist’s surgery.
What this means is if you use your home study to do business, you are entitled to deduct interest expenses. You may still get a full main residence capital gain tax exemption on sale of house property. However, if you used a portion of your dwelling exclusively for running a business, you will not be eligible for the CGT exemption for that part of your home.
Renovating or Building a Home
You are allowed to treat land as a main residence for a maximum of 4 years if:
- You have ownership interest in that land
- You are building or renovating a dwelling on the land and
- If you move into the dwelling as soon as practicable and continue to use the dwelling as your main residence for at least 3 months.
Foreign Residents and Main Residence CGT Exemption
Foreign residents are not able to claim main residence capital gains tax exemption. This is following a legislation in the 2017-18 budget that announced foreign resident vendors will not be eligible for main residence exemption.
There are several situations that determine eligibility for main residence capital gains tax exemption. While this post is not exhaustive, it offers great guidelines. This tells what the consequences are based on your unique situation. Consulting an accountant in Sydney can give you more details on main residence CGT exemption.