Buying your own home is often the best investment you can make. Not only can you benefit from an increase in wealth when the property market rises, but the gain you make can be 100% tax free.
Key Points
You must be an Australian resident for tax purposes.
There must be a 'dwelling' on the property.
You must have lived on the property for a reasonable amount of time.
The exemption only applies to two hectares or less.
The property has not been used to earn assessable income.
You can continue to treat the property as a main residence after you move out in certain circumstances.
You and your spouse can only claim one main residence at a time.
In Detail
Your main residence exemption period commences the day you purchase a property if you move in as soon as practicable. If you buy land to build a dwelling on you have four years to move into a dwelling on the property. If you rent the dwelling first, this period will not be exempt.
If you sell your old main residence within six months of acquiring your new main residence, both properties are covered by the main residence exemption. However, if it takes longer then six months to sell the old property, part of the gain will be taxable.
If a property has a portion of main residence use and a portion of taxable use, the capital gain is apportioned by the number of taxable use days divided by the total number of days owned. This is the case regardless of whether you claim a deduction for the interest and rates for the taxable portion.
If you move out of your main residence, you can continue to treat it as your main residence for up to six years if it is used to produce income or indefinitely if it is not used to produce income.
If you start using the property to produce income and do not continue to treat the property as your main residence, you need to have your property valued at the end of the main residence exemption period. This valuation becomes the costbase when you eventually sell the property. This also resets the 12 month discount period to the date the property ceases to be your main residence.
The mere act of completing your tax returns tells the ATO whether you have chosen to treat the property as your main residence.
If you are married or in a domestic relationship and you each own a house, you can only use the main residence exemption on one of the properties. Each spouse can choose a different property to use the exemption for, however they would only get half of the exemption for the period their spouse chose the other property.
Case Study
Florence purchased her first home in Gembrook, Victoria on 1 October 2009 for $350,000. She moved into the property immediately. On 1 July 2014 she started a business from home making novelty tombstones for animals. She worked out that she used 25% of the area for her business, however she never claimed the interest or rates.
On 31 December 2017 she moved in with her partner Rachel, who also owned a house. They decided to claim the main residence exemption of Rachel's house as it was in a better part of Gembrook, Victoria. The house was valued at this point to be $600,000. Florence started renting the house out after she moved out, however six months later she received an offer of $650,000 to sell the house, which she accepted. The contract date for the sale was 30 June 2018.
Although Florence did not claim expenses on the portion of her house that was used for business, it is still taxable for CGT purposes. Therefore, the first part of the CGT is calculated as follows:
Gross Gain $600,000 - $350,000 = $250,000
Days 100% exempt = 1,734
Days 75% exempt = 1,279
Total days = 3,013
Taxable portion = 1,279 / 3,013 x 25% = 10.61%
Gross taxable gain = $250,000 x 10.61% = $26,525
Net capital gain = $30,425 x 50% = $13,263
As the property was rented from 1 January 2018 to 30 June 2018, the CGT discount resets to 1 January 2018 for the second part of the gain. Therefore, the taxable net capital gain for the second portion of the gain is $50,000.
Therefore, Florence needs to pay tax on $63,263 on the sale of her house. As she is in the second highest tax bracket, Florence's tax bill is $24,673.
References
Income Tax Assessment Act 1997
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