The CGT main residence exemption explained

The basic exemption

The capital gains tax legislation allows for a disregard of any capital gain or loss arising from the sale of a dwelling that has been your main residence throughout the entire period you owned it. This disregard is outlined within Subdivision 118-B of the Income Tax Assessment Act 1997.

To qualify, the property must have genuinely served as your home. This includes not only the dwelling itself, but also the land directly underneath it, up to a maximum area of 2 hectares.

The rules governing this exemption differ depending on residency status. Australian-resident individual taxpayers are subject to standard rules, while certain non-residents had their access to this exemption removed from 30 June 2020, although some transitional relief may have applied.

The 6-month rule

The law recognises that people often purchase a new home before selling their existing one. To accommodate this, a provision allows both properties to be treated as the main residence for a period of up to 6 months. This arrangement helps to avoid capital gains tax (CGT) mismatches that could otherwise occur during the transition between homes.

This 6-month period is subject to conditions, and the specifics of these conditions determine eligibility. If the period of dual main residence status extends beyond 6 months, the CGT exemption is not applied in full.

Partial exemption rules are then applied to determine the taxable capital gain.

The 6-year absence rule

Section 118-145 of the Income Tax Assessment Act 1997 provides specific conditions under which a property can still be considered a main residence for Capital Gains Tax (CGT) purposes, even when the owner is not living there. If a dwelling is used to produce assessable income while the owner resides elsewhere, the ability to treat it as a main residence is limited to a period of up to 6 years.

However, if the dwelling is not being used to produce assessable income during the period of absence, the owner can continue to treat it as their main residence indefinitely. This means there is no time limit on the ability to claim the main residence exemption in this circumstance.

The 6-year period resets when the owner moves back into the dwelling and re-establishes it as their main residence.

Partial exemption

The main residence exemption may not apply in full if the dwelling was used to produce assessable income at any time during the ownership period. This includes situations where the property was rented out, or used to operate a business from home. In these circumstances, the capital gain may be partially exempt.

The portion of the capital gain that is exempt is determined by apportionment. This apportionment is generally calculated based on the floor area of the dwelling used to produce income, and the number of days it was used for that purpose.

Where a dwelling is first used to produce income, there may be implications for the cost base. In some circumstances, the cost base is reset to the market value at the time the dwelling was first used to produce income. It is advisable to seek professional accounting advice to confirm the impact on your specific situation.