Do you pay tax when you sell your family home

Do you pay tax when you sell your family home? Let’s examine the main residence exemption that excludes your home from capital gains tax and the triggers that reduce or exclude that exemption.

Capital gains tax (CGT) applies to gains you have made on the sale of capital assets (assets you make money from). Unless an exemption or reduction applies, or you can offset the tax against a capital loss, any gain you made on an asset is taxed at your marginal tax rate.

1. What is the main residence exemption?

Your main residence is the home you live in. In general, CGT applies to the sale of your home unless you have an exemption, partial exemption, or you can offset the tax against a capital loss.

If you are an Australian resident for tax purposes, you can access the full main residence exemption when:

• you sell your home if your home was your main residence for the whole time, you owned it
• the land your home is on is or is under 2 hectares
• you did not use your home to produce an income – for example running a business from your home or renting it out.

If the home is on more than 2 hectares, if eligible, you can treat the home and up to 2 hectares of the land it is on as one asset and claim the main residence exemption on this part.

However, if you use your home to produce an income by running a business from home or renting it out, CGT can apply to the portion of the home used to produce income from that time onwards.

2. What’s a main residence?

For CGT purposes, your home normally qualifies as your main residence from the point you move in and start living there. However, if you move in as soon as practicable after the settlement date of the contract, that home is considered your main residence from the time you acquired it.

If you cannot move in straight away because you are in the process of selling your old home, you can treat both homes as your main residence for up to six months without impacting your eligibility to the main residence exemption.

Example | Moving into a new home while finalising the sale of your old home

The exemption applies if you were living in your old home for a continuous period of 3 months in the 12 months before you disposed of it, you did not use your old home to produce an income (rented it out or used it as a place of business) in any part of that 12 months when it was not your main residence, and your new property becomes your main residence.

• If the sale takes more than six months and if eligible, the main residence exemption could apply to both homes only for the last six months prior to selling the old home. For any period before this it might be possible to choose which home is treated as your main residence (the other becomes subject to CGT).
• If your new home is being rented to someone else when you purchase it and you cannot move in, the home is not your main residence until you move in.
• If you cannot move in for some unforeseen reason, for example, you end up in the hospital or are posted overseas for a few months for work, then you still might be able to access the main residence exemption from the time you acquired the home if you move in as soon as practicable once the issue has been resolved. Inconvenience is not a valid reason and you will need to ensure that you have documentation to support your position.

How the ATO may assess your tax eligibility for the Main Residence Exemption

Proof that your property is first established or continues to be your main residence is subjective and if the issue is ever queried, some of the factors the ATO will look at include:

• The length of time you have lived in the dwelling
• Where does your family live
• Whether you moved your personal belongings into the dwelling
• The address you have your mail delivered
• Your address on the Electoral Roll
• Your connection to services such as telephone, gas and electricity, and
• Your intention.

3. Are you a Resident or a Foreign Resident?

The main residence rules were changed in 2017 to exclude non-residents from accessing the main residence exemption. 

The rules focus on your tax residency status at the time of the CGT event (normally the time the contract of sale is entered into). If you are a non-resident at the time you enter into the contract of sale, you will be unable to access the main residence exemption. This is the case even if you were a resident for part of the ownership period.

If you are a resident at the time of the sale, and you meet the other eligibility criteria, the rules should apply as normal even if you were a non-resident for some of the ownership period. For example, an expat who maintains their main residence in Australia could return to Australia, become a resident for tax purposes again, then sell the property and if eligible, access the main residence exemption.

It’s important to recognise that the residency test is your tax residency, not your visa status.

4. Can I treat my home as my main residence even if I don’t live there?

Once you have established your home as your main residence, in certain circumstances, you can treat it as your main residence even if you have stopped living there. The absence rule allows you to treat your home as your main residence for tax purposes:

• For up to 6 years if it’s used to produce income, for example, you rent it out while you are away; or
• Indefinitely if it is not used to produce income.

By applying the absence rule to your home, normally prevents you from applying the main residence exemption to any other property you own over the same period. Apart from limited exceptions, the other property is exposed to CGT.

Living overseas and renting out your home

If you moved overseas in 2019 and rented out your home while you were away but returned in 2021 and moved back into your home. A year later you decided to sell your family home. If you applied the absence rule to your home and didn’t treat any other property as your main residence during that same period, you should be able to access the full main residence exemption assuming you are a resident for tax purposes at the time of sale.

The 6-year period also resets if you re-establish the property as your main residence and subsequently stop living there but rent it out in between. So, if the time the home was income producing is limited to six years for each absence, it is likely the full main residence exemption will be available if the other eligibility criteria are met.

5. What happens if I have been running my business from home?

If your home is also set aside as a dedicated place of business (i.e., you do not have another office or workshop), then you might only be able to claim a partial main residence exemption. This is because income producing assets are excluded from the main residence exemption.

If you are running a business from home, you can usually claim a tax deduction for occupancy expenses such as interest on the mortgage, council rates, and insurance. If you claimed or were eligible to claim these expenses, then you will only be able to access a partial main residence exemption. These rules apply even if you have not claimed these expenses as a deduction; the fact that you are eligible to make a claim is enough to impact your access to the main residence exemption.

In many cases, if your home would have qualified for a full main residence exemption before it is used as a dedicated place of business, the cost base of your home for CGT purposes should also be reset to its market value at that time.

Also, if only a partial main residence exemption is available, you will need to check whether you can access the small business CGT concessions on any remaining capital gain. As these rules are complex, please contact us and we will work through the rules with you.

However, if you have only been working from home out of convenience and there is another office that you normally work from, then your eligibility to access the main residence exemption should be unaffected. The ATO has confirmed that all that time working from home temporarily during the pandemic should not impact your ability to access the main residence exemption.

There are several other issues that affect the Main Exemption rule. These include issues such as:

• Renting out rooms as an Airbnb
• You and your spouse each own homes that you have separately established as your main residences
• Divorce and the main residence rules
• Do you pay CGT on an inherited property?

We can assist you with a range of questions that relate to CGT and the disposal of your main residence. Please contact our office if you need further assistance.

We offer a 15-minute free consultation to discuss your tax, property investment and business needs. Book your complimentary consultation now.

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