When it comes to selling your family home, you might be under the impression that you don’t have to worry about taxes.
After all, the main residence exemption from Capital Gains Tax is a widely known benefit for Australian residents.
But, is your family home really tax free?
The reality can be a little more complicated when you dig down into the details.
There are some factors that can threaten your tax free status and may impact whether you have to pay capital gains tax.
Let’s explore the finer details of the main residence exemption so you can understand when your family home might not be entirely tax free.
What Is The Main Residence Tax Exemption?
The main residence tax exemption allows you to avoid paying Capital Gains Tax (CGT) if you choose to sell your primary home. That’s the short story. The longer version is a little more complex.
First, you would need to establish if you are an Australian resident, as different rules apply to foreign residents. Secondly, you need to confirm that the property meets certain eligibility conditions. The dwelling needs to be:
- The home you and your family have lived in for the entire period you’ve owned it.
- A home you reside in – the property can’t have been used to produce an income such as rental income or profit from renovating and flipping.
- On land of 2 hectares or less.
Finally, you would need to prove that the property is your main residence. This includes things like;
- You and your family live there
- Your personal belongings are kept inside
- Your mail is delivered to this address
- Your address is listed on the electoral roll
- Your utilities and services are connected
If you meet all of these requirements, you shouldn’t be liable for CGT when you sell your home. If you find that you meet some of the criteria, but not others, you may still be eligible for a partial exemption. If you are unsure, reach out to the team at Cadenze Partners to discuss.
The Details That Might Impact Your Eligibility
Now that we understand the basic premise of the exemption, it’s important to dig a little deeper into the aspects that would be considered a ‘grey area’ to see whether you would actually be liable for CGT when selling your family home.
Income Production
If you have used your home to produce an income, you may only be eligible for a partial exemption. Common scenarios that impact the exemption are:
- Renting out some or all of the home (such as AirBnB)
- Running a business from home
Your home may end up being liable for CGT for the portion of time it was used to generate income. Be mindful that platforms like Airbnb report all their transactions to the ATO every 6 months, so data can be matched against your income tax return – ie. you won’t be able to hide the income!
Foreign Residents
If you are not an Australian tax resident when you enter into a contract to sell your property, you are unlikely to be eligible for the main residence exemption.
There are a couple of important things to note here. The first is that the residency test is based on your tax residency, not your visa status. Secondly, your residency status is judged when the contract for the sale of your property is signed. This applies regardless of what your residency status has been at other points during the time you have resided in the family home.
If you are unsure of your tax residency status, then seek advice before making any decisions about selling your home. You may find yourself liable for CGT if you aren’t an Australian tax resident.
Not Present in the Residence
What if you move out of your home for a period of time, will the exemption still apply? In certain circumstances, you can apply an ‘absence rule’ that allows you to treat the home as your main residence for tax purposes if:
- Your home is used to produce an income while you are away (such as renting it out) for a period of up to 6 years
- It is indefinitely vacant while you are away
It is important to note that if the absence rule is applied to your ‘main residence’ it cannot be applied to any other property you own over the same period. That other property would be exposed to CGT. Also, if you happen to re-establish the property as your main residence, the 6 year time period is reset and can be reinstated in the future if you have further absences from the main residence.
Timing of the Sale
As we’ve already learned, your home qualifies as your main residence when you move in and start living there. But, what if there is a timing issue where you can’t move in as soon as you acquire the property or you haven’t sold your last residence yet?
When it comes to timing, there are some points of leniency:
- If you move in as soon as practical after the settlement date of the contract, the home is considered your main residence from the time you acquired it.
- If there is a crossover period between selling your last residence and acquiring the new one, both properties can be treated as your main residence for up to 6 months without impacting your exemption eligibility (as long as you meet the other core criteria).
- If selling your previous residence takes more than 6 months, the main residence exemption could apply to both homes for the last 6 months prior to selling the first residence. You are generally able to specify which of the two properties is your main residence for any period exceeding the 6 month period so that the exemption still applies to the one you are selling.
- If you purchase a property that is already tenanted and you cannot move in right away, it does not become your main residence until you actually move in.
- If there is something preventing you from moving into the residence after purchasing, such as an overseas work assignment or illness, you must move in as soon as practical once the issue is resolved to qualify for the exemption.
For anything that falls outside the standard practice of moving into a home after purchase, ensure that you have some documentation to support your position otherwise you could risk jeopardising your exemption status.
Two Main Residences for a Couple
What if you and your spouse each have a residence that is considered a ‘main residence’? Can the exemption apply to both? The answer is yes, but also no.
You are not able to claim the full exemption on both homes. Instead, you can choose to:
- Name one of the dwellings as the main residence for you both
- Nominate different dwellings and split the exemption between you
The rule applies to each home regardless of how they are held legally, such as sole ownership, tenants in common, or joint tenants.
In the Event of Divorce
What happens if you and your spouse get a divorce? Well, it will depend on the status of the property before the divorce took place.
- If the home is transferred to one of the spouses (not from a company or trust), both individuals used the home as their main residence prior to the divorce, and the standard eligibility conditions are met, then the full main residence exemption should apply when the property is sold.
- If the home only qualified for the exemption for only part of the ownership period, then a partial exemption may still be available. The spouse receiving the property may be liable for some CGT when the property is sold.
Is Your Home Completely Tax Free?
The main residence exemption may seem straightforward on the face of things, but can get quite complicated quite quickly! That’s why it can be helpful to seek advice from an experienced tax specialist to understand how the exemption might work for your particular circumstances.
Here at Cadenze Partners we regularly navigate the ins and outs of tax exemptions, so get in touch with us if you’d like to understand more about your eligibility. This is particularly important if you intend on selling your home soon.
Reach out to our helpful team today.