Is Your Family Home Really Tax-Free?
9 August 2024
Is Your Family Home Really Tax-Free?
The main residence exemption typically exempts your family home from capital gains tax (CGT) when you sell it. However, as with most tax matters, it’s not always straightforward.
What Makes a Home Your Main Residence?
A home is generally considered your main residence if:
- It’s where you and your family live.
- Your personal belongings are there.
- It’s your mailing address.
- It’s your address on the electoral roll.
- You have utilities connected in your name.
- You intend for it to be your main residence.
The time you’ve lived in the home matters, but your intention is key.
When Does the Main Residence Exemption Apply?
You can access the full exemption if:
- Your home was your main residence the entire time you owned it. However, you can still consider a home as your main residence even after moving out, subject to the absence rule explained below.
- You didn’t use it to produce income.
- The land 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.
The Absence rule – Can the main residence apply if you move out?
You might have heard about the ‘absence rule’. This rule allows you to continue to treat your home as your main residence for tax purposes:
- For up to 6 years if the home is used to produce income, for example you rent it out while you are away; or
- Indefinitely if it is not used to produce income.
When you apply the absence rule to your home, this 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.
Partial Exemption
If you used your home to produce income, you might only get a partial exemption. This can apply if you:
- Ran a business from home (working from home is generally okay).
- Rented out the home or part of it.
From 1 July 2023, platforms like Airbnb must report all transactions to the ATO, so ensure your income reporting is accurate.
Foreign Residents and Changing Residency
Foreign residents can’t access the exemption, even if they were residents for part of the ownership period. However If you’re a Australian tax resident at the time of sale and meet other criteria, you might still qualify, even if you were a non-resident previously. 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’re unsure about your status, please contact us for assistance.
Can a couple have a main residence each?
Let’s say you and your spouse each own homes that you have separately established as your main residences.
The rules don’t allow you to claim the full CGT exemption on both homes. Instead, you can:
- Choose one of the dwellings as the main residence for both of you during the period; or
- Nominate different dwellings as your main residence for the period.
If you and your spouse nominate different dwellings, the exemption is split between you:
- If you own 50% or less of the residence chosen as your main residence, the dwelling is taken to be your main residence for that period and you will qualify for the main residence exemption for your ownership interest;
- If you own greater than 50% of the residence chosen as your main residence, the dwelling is taken to be your main residence for half of the period that you and your spouse had different homes.
The same rule applies to your spouse.
The rule applies to each home that the spouses own regardless of how the homes are held legally, i.e., sole ownership, tenants in common or joint tenants.
