Most real estate located in Australia is subject to capital gains tax (CGT). This includes vacant land, business premises, rental properties, holiday houses and hobby farms.
Your ‘main residence’ is also referred to as ‘principal place of residence’ (PPOR) and is generally exempt from CGT. To qualify for the CGT exemption, the property must have a dwelling on it which you must have lived in. Also, you must not have used it to earn rent or run a business. Finally, it must not be on more than two hectares of land.
Generally, a dwelling is considered to be your main residence if:
- you and your family live in it
- your personal belongings are in it
- it is the address your mail is delivered to
- it is your address on the electoral roll
- services such as gas and power are connected.
The main residence exemption is not based on one factor alone. The weight given to each varies depending on individual circumstances. The length of time you stay there and your intention in occupying it may also be relevant.
If the full exemption applies, your capital gain or loss is disregarded. You do not pay tax on any capital gain, and you cannot use any capital loss to reduce your assessable income. Alternatively, you may be entitled to a partial exemption.
If you acquire a new home before you dispose of your old one, both dwellings may be treated as your main residence for up to six months.
- If you sell your old home within six months
Both dwellings are treated as your main residence 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 disposed of it
- you didn’t use it to produce assessable 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 your old home within six months of acquiring the new one, both dwellings are exempt for the whole period between when you acquire the new one and dispose of the old one.
2. If you sell your old home after six months
If it takes longer than six months to dispose of your old home, both homes are only exempt for the last six months before you dispose of 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 will be only partially exempt from CGT.
If you decide to claim an exemption for the old home for the period in excess of the six months by choosing to treat it as your main residence for that period under the ‘continuing main residence status after moving out’ rule, you get only a partial exemption when you dispose of your new home.
Generally, a property ceases being your PPOR once you stop living in it. However, in some cases you can choose to continue treating a dwelling as your PPOR for CGT purposes even though you no longer live in it.
- can treat the dwelling as your main residence for:
- up to six years if it is used to produce income
- indefinitely if it is not used to produce income
- can’t treat any other dwelling as your main residence for that period (except for a limited time if you’re moving house).
You can’t make this choice for a period before a dwelling first becomes your main residence.
Is CGT Applicable for Sale of a Vacant Block?
The CGT exemption is not applicable when you sell a vacant block even if you had purchased the block with the intention to build your residence on it.
What If I Transfer My PPOR as a Gift?
If you give a property to family or friends, or sell it to them for less than market value, and you’re entitled to the main residence exemption, it will still apply.
What If I Transfer My Share of PPOR Due to Relationship Breakdown?
If you transfer real estate to your spouse or former spouse upon the breakdown of your marriage or relationship, you may be eligible for a rollover of the asset.
It’s important to:
- keep records of your real estate, including your own home (in case in the future you start renting it out or running a home business)
- remember that when you sell real estate, the time of the event (the time at which you make a capital gain or loss) is when you enter into the contract, not when you settle.
6-month rule: Moving to another main residence
6-year rule: Treating a dwelling as your main residence after you move out
Disclaimer: This blog post has been simplified to cover the common scenarios relating to CGT and PPOR owned by residents. This should not be construed as advice from Glint Accountants. Therefore, we encourage readers of this blog post to contact Glint Accountants for assistance with their specific circumstances.
Prefer to speak to someone about your investment property? Our director, Geraldine Lee, is a Fellow of CPA Australia with an investment property portfolio that includes residential and commercial properties interstate, locally and overseas. She is well-versed in the complexities of Australian taxation laws and how they apply to investment properties. Contact us at Glint Accountants to make an appointment to discuss taxes and deductions relating to your rental property, capital gains taxes, suitable structures for future property investments or even about re-financing your investment loan.