If you sell a property you would normally pay Capital Gains Tax (CGT) on any profit you make. However, you can reduce or avoid this CGT if the property is considered to be your main place of residence. What is your ‘Main Residence,’ and how do you apply the Main Residence Exemption?
How to tell if a Property is your Main Residence?
Under normal circumstances your main residence (PPR) is your home. A few examples of factors the Australian Taxation Office (ATO) considers when determining if a property is your main residence are:
• If you and your family reside in the property;
• Whether your personal belongings are stored in in the property;
• Does Australia Post deliver your mail to the property;
• You are registered to vote on the electoral role at the address;
• Whether you have connected basic services and utilities – phone, electricity etc;
• Your intentions around occupying the dwelling.
While there is no minimum time a person has to live in the property a good ‘rule of thumb’ is 6 months. That allows sufficient time for some or all of the factors above to be established. If you have occupied the property for less than 6 months it certainly does not exclude you from using the main residence exemption. The rule of thumb is more of a guide to use in discussions.
In order for the Main Residence exemption to apply, the property sold must include a dwelling. A dwelling is anything that is used wholly or mainly for residential accommodation. Examples include:
• a home or cottage;
• an apartment or flat;
• a strata title unit;
• a unit in a retirement village;
• a caravan, houseboat or other mobile home.
The mere intention to construct a dwelling on the property is not sufficient to obtain the exemption. You must build the dwelling and then occupy it.
Can You Have More Than One Main Residence?
Any individual (or couple in the case of marriage) can only ever have one main residence at any point in time. There is a limited exemption to this rule where one main residence is being sold and another one is being purchased .
In this case the individual (or couple) is allowed an overlap period of 6 months during which both properties may be treated as a main residence. For this overlap rule to apply you need to ensure that:
1) The new property will qualify as your main residence immediately after the sale of the old property;
2) You occupied the old property for at least three consecutive months in the 12 months immediately prior to the sale; and
3) The old property wasn’t used to produce income in the 12 month period immediately before sale.
Can You Earn Rental Income from Your Main Residence?
Yes you can…
While you can only have one main residence at any point in time you do not need to live in the dwelling for the entire period of ownership for it to continue to be your main residence for tax purposes. If you own a property which is currently your main residence you can move out of the property for up to six years. 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 re-occupy the building before the end of the six 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 Renovations?
Once again the quick answer is yes!
If you purchase a property, occupy the dwelling while you renovate and then sell the property it is still your main residence. Even if you repeat this process multiple times in a given year any profit you make on the sale of the properties is generally exempt from tax. I say ‘generally’ because there is a point at which you will cross a line and property development/renovation becomes your business. Any profits you make in business are not capital gains and the whole discussion changes significantly. That is a topic for another article.
Can you subdivide your block and claim the Main Residence Exemption?
As we covered earlier the main residence exemption requires a dwelling on the property at the time of sale. If you have a large block of land and choose to subdivide the land so that you can sell off an excess/unused portion there is likely no dwelling on that portion of the property. Therefore, any profit you make on this sale would not qualify for the main residence exemption.
In some cases the opposite situation can arise. You may decide to purchase a neighbouring block of land and expand your backyard. The main residence exemption will apply to the sale of the combined area of land if both properties are sold together and the total area of land does not exceed 2 hectares.
What if you can no longer occupy your Main Residence?
The main residence exemption can also apply where the owner is no longer able to occupy the dwelling. This is quite common when aging individuals lose the the ability to live independently. Extending the main residence period in these situations ensures people are not unfairly disadvantaged. The property will need to be sold eventually in order to pay medical and living expenses for the individual. It would be an unfortunate outcome if they had a tax bill on top of everything else going on.