Understand Capital Gains Tax and the main residence exception- Damian Collins

The concept of your ‘main’ or ‘principal’ residence is an important one due to its significant influence on your future financial situation.

When it comes time to sell your home, it is one of the few windfalls you can receive (assuming you make a profit when you sell) that is not subject to tax.

Your main residence is exempt from tax on any capital gains provided it meets a few criteria.

For most people, figuring out what is your main residence is pretty straightforward.

But for others, it is not so simple due to their circumstances. In some cases, you may even have a choice as to what property you claim. For these situations it’s important to understand a few key rules:

It must be a dwelling

A dwelling is considered a building or part of a building consisting mainly of residential accommodation with land under the accommodation. Therefore it could be a caravan or mobile home, but cannot be vacant land.

You must reside in the property

Definitions are not explained in the tax legislation, however the Australian Tax Office (ATO) has listed a number of factors that are taken into account to determine whether they would allow your claim for main residence exemption. These include:

  • Length of time you lived in the property (it’s often assumed this should be at least 3 months but it’s not stipulated by law)
  • Where the rest of your immediate family live
  • Whether you keep your personal belongings at the property
  • The address where your mail is actually delivered
  • Whether your address on the electoral roll matches that of the property
  • Connection of services such as gas, telephone and electricity
  • Your intention of occupying the premises

Other considerations

One main residence at a time
You can only claim one residence as your ‘main’ residence at any one time. However, you are allowed a six-month overlap of main residences when you are changing homes (between the time of acquisition of the new and disposal of the old).[sam id=31 codes=’true’]

Temporary absence
If you choose to move elsewhere and rent out your home at some stage, you can continue to claim the main residence status on the property for up to 6 years even though you don’t actually live there. This will not impact on your ability to claim deductions on your now investment property, it will only impact on CGT.

The catch is that you will not be able to claim the other property you are now living in as your main residence during this time, if you claim your former home as your main residence.

Partial exemption
There are times when a property can only receive a partial exemption. One of those is when you move house, your new home becomes your main residence, and you then rent out your old home.

During the time in which your old property is rented and no longer considered your main residence, it will be subject to CGT. However CGT will not be calculated during the period you lived there and claimed it as your main residence.

The other time your main residence will receive a partial exemption is when a part of it is used for business and other such income producing purposes (e.g. a beautician servicing customers in a spare bedroom). In these circumstances, the proportion of the dwelling used for such purposes will be subject to CGT for that period, while the rest of the dwelling will continue to be exempt.

This area can be tricky to interpret so do seek professional advice if you have concerns.

Pre-occupation period
If you are building a home on vacant land or substantially renovating a property and therefore cannot live at the property, you can still claim main residency in both examples under a “pre-occupation exemption”.

Under this exemption you can treat the property as your main residence for up to 4 years before you actually occupy it provided you occupy it as soon as practicable and live there for at least 3 months after doing so. Naturally, you must not claim any other property as your main residence during this time.

Property in individual names
With a few minor exemptions, property can only be claimed as a main residence if held in individual names. Property held in a company or trust therefore can not claim the CGT break.

Because of this significant tax implication, most people hold their home in their personal names. If asset protection is an issue, best to consider holding it in just one partner’s name which still allows you to access the CGT benefits while affording some asset protection.

Taxation is not always a straightforward area and many rules are subject to interpretation so I encourage you to seek professional advice from your accountant if you have any questions or concerns.

Momentum Wealth and its affiliated entities are not Accountants. While all information is provided in good faith, you should seek your own independent advice in relation to all tax matters.

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Damian Collins

About

Damian is managing director of Momentum Wealth, a Perth based property investment consultancy firm. A successful property investor in his own right, Damian formed Momentum Wealth to assist time poor investors in building their portfolios and applies his many years of experience to help clients accelerate their wealth creation. Visit www.momentumwealth.com.au


'Understand Capital Gains Tax and the main residence exception- Damian Collins' have 11 comments

  1. January 7, 2014 @ 9:43 am Hamish

    What is the best strategy if one wants to develop one’s PPR? We have a large block which could be subdivided and another property built.

    The PPR is currently held in my wife’s name, and there is some debt against the property. We would need to borrow to fund 100% of the construction of new dwelling.

    Apparently there are GST issues here if the purpose of the new building is to be a new PPR vs. rental property vs. sold off as a development.
    thanks

    Reply

    • January 7, 2014 @ 11:07 am Michael Yardney

      Hamish
      Thanks for the question and yes – you are correct – there are some significant tax implications in developing your PPR – this is not the type of advice that can be given in this medium – it really requires you to speak with your accountant about your individual circumstances

      Reply

  2. February 8, 2014 @ 11:10 am Lorraine

    Hi Michael, I have an investment property (Property 2) which is rented at the moment. I have a 100%purchase price loan against this property. I have no debt on my current PPR (Property 1) where I currently live however a line of credit is still open against this Property 1. I intend to make Property 2 my PPR in a few months time. I wanted to borrow approx 75% of the equity in Property 1 to pay down part of the loan on Property 2. Would I be able to claim a tax deduction on the interest on the new loan against Property 1 when I have moved to Property 2 and Property 1 becomes the new investment property; or will I only be able to claim tax deductions on all other expenses, such as, agent management fees, body corporate fees, rates etc. given that the money borrowed isn’t for the purposes of purchasing the investment property but for the purposes of paying down the loan on new PPR.

    Reply

  3. February 8, 2014 @ 11:36 am Lorraine

    Hi Michael, Following my previous question about investment property tax deductions against interest on money borrowed to pay down PPR. My accountant has said yes, it can be done, however, the bank has raised concerns that the ATO would not be happy about this arrangement. Your thoughts would be much appreciated. Thanks.

    Reply

    • February 8, 2014 @ 1:58 pm Michael Yardney

      Lorraine
      This is clearly a tax issue.
      It’s a question to ask an accountant not a bank

      Reply

  4. February 25, 2014 @ 3:51 pm david

    Hi
    If a subdivision of a PPR is assessed as profit making and producing assessable income, will the interest paid (plus rates etc) on any mortgage (whilst a PPR and of course while one is living there) become a tax deduction? from date of acquisition to realisation of the subdivided property? What happens if in a project of subdividing the PPR and the result is you sell one and pay assessable income, keep one and live in it – do you pay assessable income then even if it is/has been your PPR when you sell? Curly i think!! Appreciate your views.
    Thanks
    David

    Reply

    • February 25, 2014 @ 4:56 pm Michael Yardney

      David
      We can’t really give this type of tax advice on a website – it opens us up to all sorts of issues.

      You really should ask your accountant

      Reply

  5. July 18, 2014 @ 11:52 am Megan

    Hi Michael,
    we have purchased a block of land and are currently in the process of building. How long would we need to live in the property immediately after the building is finalised to qualify for CGT exemption, before selling? we are currently renting whilst building.
    Look forward to hearing from you,
    thanks.

    Reply

    • July 18, 2014 @ 3:57 pm Michael Yardney

      Mega

      I’m not licensed to give tax advice but I believe there is no exact time specified. Of course the ATO would ask more questions if you only live din it for a day.

      If government first home grants apply then there are minimum times depending on the state in which you live

      Reply

  6. March 27, 2015 @ 10:15 am Madeleine

    Hi Michael,
    My husband bought a property that we had to rent out for the first 6 months of ownership due to a rental contract already being in place. We moved in in Aug 2012 and have lived there since. We were able to claim the FHOG – am I right in assuming that now we have sold it (or it will be in a month) we will not be subject to CGT?

    Thanks,
    Madeleine

    Reply

    • March 27, 2015 @ 2:28 pm Michael Yardney

      Madeleine
      What you say sounds right – but best check with an accountant

      Reply


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