Generally, a capital gain or capital loss arising from the disposal of a resident taxpayer’s main residence is exempted from capital gains tax – CGT (Subdiv 118-B) but there are some exceptions.
Partial exemption is available in the following circumstances:
– The taxpayer did not use the house as his main residence for the entire period of ownership (although note that specific absences are allowed)
– The house was used for income-producing purposes while it was the taxpayer’s main residence and the taxpayer could have deducted the interest on the loan if was taken out to purchase the property (s 118-190).
As an example, a taxpayer purchased a property on 1 July Year 1 for $350,000. The property was rented out between 1 July Year 1 and 30 June Year 1. From 1 July Year 2, he used the property as his main residence until it was sold on 30 June Year 3 for $500,000.
The capital gain on the sale of the property is $150,000 and a partial exemption is available (NOT a full exemption).
The amount of the capital gain that is exempt is :
$150,000 × 730 days (2 years) / 1,095 days (3 years) = $100,000 (rounded)
The amount of taxable capital gain is $50,000. As the taxpayer has held the property for at least 12 months, he is entitled to a 50% discount and therefore, the amount of capital gain is $25,000.
Another example for a taxpayer who operates his business from his own home, purchased a property on 1 July Year 1 for $350,000. He used the property as his main residence AND for seeing clients on weekdays. He estimates that 40% of the property was set aside for his business and he claims 40% of the interest deduction on the loan that he took out to buy the property. On 30 June Year 3, he sold the property for $500,000. The capital gain on the sale of the property is $150,000 and a partial exemption is available (NOT a full exemption).
The amount of the capital gain that is exempt is:
$150,000 × 60% = $90,000
The amount of taxable capital gain is $60,000 (40% of $150,000). As this taxpayer has held the property for at least 12 months, he is entitled to a 50% discount and therefore, the capital gain is reduced to $30,000.
Temporary absence allowed
Temporary absence from a taxpayer’s main residence is specifically allowed so that the main residence exemption is not lost during the period of temporary absence.
If a property ceases to be a taxpayer’s main residence, the taxpayer can choose to continue to take it as his main residence, provided no other place is taken as his main residence. If the property is used to produce assessable income, the taxpayer can choose to continue to have this property as his main residence for up to a maximum of six years. This six year period is reset each time the taxpayer moves back into the property and take it as his main residence.
As an example, a taxpayer lived in a house for three years. He was then posted overseas for five years and rented the house out during that time. On his return, he moved back into the house for two years. He was then posted overseas once more for four years (once more renting out the house), at the end of which he sold the house. He did not take any other property as his main residence during his absences. He may choose to continue to take the house as his main residence during both absences, because each absence was less than six years.
Moving to another main residence
If you acquire a new home before you sell your old one, both dwellings are considered as your main residence for up to six months if:
– you lived in your old home and it was your main residence for a continuous period of at least three months in the 12 months before you sold it
– you did not use it to produce income (such as rent) in any part of that 12 months when it was not your main residence
-the new dwelling becomes your main residence.
So if you sell the old home within six months of acquiring the new home, both dwellings are exempt for the whole period between when you acquire the new home and sell the old home.
Example: Exemption for both homes
Jill and Norman bought their new home under a contract that settled in February and they moved in immediately. They sold their old home under a contract that settled in May. Both the old and new homes are considered their main residence for the period February to May, even though they didn’t live in the old home during that period.
Old home sold after six months
If it takes longer than six months to sell your old home, both homes are exempt only for the last six months before you sell the old one. If you decide to claim the main residence exemption for your new home from the time you first move in, then your old home is only partially exempt from CGT.
Example: Partial exemption for old home
Jeneen and John bought their home under a contract that settled on 1 JAN 1999 and they moved in immediately. It was their main residence until they bought another home under a contract that was entered into on 2 NOV 2015 and settled on 1 JAN 2016.
They retained their old home after moving into the new one on 1 JAN 2016, but didn’t use the old home to produce income. They sold the old home under a contract that settled on 1 OCT 2016. They owned this home for a period of 6,484 days.
Both homes are considered their main residence for the period 1 APR 2016 to 1 OCT 2016, the last six months that Jeneen and John owned their old home. Therefore, their old home is considered their main residence only for the period before settlement of their new home and during the last six months before settlement of the sale of the old home.
The 91 days from 1 JAN 2016 to 31 March 2016, when the old home is not their main residence, are taken into account in calculating the proportion of their capital gain (91 ÷ 6,484).
If it takes longer than six months to sell your old home, you can get an exemption for the old home for the period in excess of the six months by choosing to consider it as your main residence for that period under the ‘continuing main residence status after moving out’ rule. If you do this, you get only a partial exemption when you sell your new home.
Example: Partial exemption for new home
If Jeneen and John choose to consider their old home as their main residence for the period from 1 January 2016 to 31 March 2016 under the ‘continuing main residence status after moving out’ rule, they get a full exemption when they sell it.
Because both homes can only be exempt for a maximum of six months when moving from one to the other, Jeneen and John cannot get a full exemption for their new home when they sell it. The exemption is not available for the new home for the 91 days from 1 January 2016 to 31 March 2016.
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