Is your family home really tax free?
The main residence exemption exempts your family home from capital gains tax (CGT) when you dispose of it. But, like all things involving tax, it’s never that simple.
As the character of Darryl Kerrigan in The Castle said, “it’s not a house. It’s a home,” and the Australian Taxation Office’s (ATO) interpretation of a main residence is not fundamentally different. A home is generally considered to be your main residence if:
· It’s where you and your family live
· Your personal belongings have been moved into the dwelling
· It is where your mail is delivered
· It’s your address on the electoral roll
· You have connected services such as telephone, gas and electricity (in your name); and
· It is your intention for the home to be your main residence.
The length of time you have lived in the home is important, but there are no hard and fast rules. Your intention takes precedence over time spent as every situation is different.
When does the main residence exemption apply?
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 (see Can the main residence apply if you move out?).; and
· You did not use your home to produce any income (see Partial exemption below), and
· The land your home is on is 2 hectares or less. If your home is on more than 2 hectares, for example on farmland, the exemption can apply to the home and up to 2 hectares of adjacent land.
Partial exemption
If you have used your home to produce income, you won’t normally be able to claim the full main residence exemption, but you might be able to claim a partial exemption.
Common scenarios impacting your main residence exemption include:
· Running a business from home (working from home is ok), and
· Renting the home or part of the home.
In these scenarios, from the time you started to use the home to generate income, that part of the home is likely to be subject to CGT. And, a word of caution here, as of 1 July 2023, platforms such as Airbnb must report all transactions to the ATO every 6 months. This data will be used to match against the income reported on income tax returns.
Foreign residents and changing residency
Foreign residents cannot access the main residence exemption even if they were a resident for part of the time they owned the property.
If you are a non-resident at the time you enter into the contract to sell the property, you are unlikely to be able to access the main residence exemption. Conversely, 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. Australia’s tax residency rules can be complex. If you are uncertain, please contact us and we will work through the rules with you.
