When is the sale of a taxpayer’s home subject to CGT?
It is commonly understood that the sale of a taxpayer’s private home is exempt from CGT … but this is not always the case. In fact, the Main Residence exemption is probably one of the most complex and misunderstood areas of tax law.
The main residence exemption
The main residence exemption (MRE) provides a full or partial exemption in respect of a capital gain or loss that a taxpayer makes from a CGT event (e.g. a disposal) happening to their ‘dwelling’.
The MRE only applies to an individual taxpayer.
Importantly, the property must contain a ‘dwelling’, which is defined as including a unit of accommodation that is:
- a building or is contained in a building, and consists wholly or mainly of residential accommodation, or
- a caravan, houseboat or other mobile home.
If the taxpayer has lived in their dwelling for the entire period of ownership and has not used the property for income-producing purposes then the taxpayer will generally be eligible for a full tax exemption, provided the property is under 2 Hectares (Approx 5 acres) in size.
However the exemption is reduced in some circumstances.
So what are the circumstances where the sale of a property, even where the taxpayer has lived in it, may give rise to a tax liability?
Common situations where a Main Residence exemption is not available, or at least partially taxable, include:
- There is no dwelling – vacant land is not eligible;
- Subdividing land off your home and selling the land separately;
- The property is owned by a Trust or Company;
- The property is greater than 2 hectares in size;
- When you purchased the property, it came with tenants and was rented for a period after settlement, but before you moved in;
- The property was rented during the ownership period. It is important to note, that moving into the property before sale, regardless of how long, does not make the property your main residence for the whole ownership period. If it was rented, it is likely that the property will be subject to capital gains tax in some proportion;
- The property was inherited and the property was rented (or subject to tax) to the deceased;
- The property is partially taxable because of:
- using part of the property for a home-based business, or renting out a room, while the taxpayer is living in the property (i.e. claiming a proportion of rates, insurance and interest).
- using the property for short-term rental (e.g. Airbnb) during periods when the taxpayer is away on holidays
- renting out the property when the taxpayer has moved somewhere else.
- You have another main residence at the same time (generally speaking, you are only eligible for one main residence per couple, even if the other property is owned by your spouse and you are not on title); or
- You are a non-resident for tax purposes (special rules can apply).
With COVID relocations, and high AirBNB and rental yields, we are seeing more and more situations where properties are subject to Capital Gains Tax on sale – sometimes where the property owner had no idea it would be subject to tax, because they had incorrectly assumed the property was their main residence. It is important to speak with your accountant if you change how you are using your home.
The ATO are also well aware of the property disposals, as they matching property disposals from the Land Registries to your tax returns and declaring the same in your “prefill” information for the relevant year.
Disclaimer: This article contains general information only. Regrettably, no responsibility can be accepted for errors, omissions or possible misleading statements or for any action taken as a result of any material in this guide. It is not designed to be a substitute for professional advice, as such a brief guide cannot hope to cover all circumstances and conditions applying to the law as it relates to these items.