The main residence exemption is probably the most well-known feature of the capital gains tax (CGT) system to non-tax professionals.  In straightforward cases, a property owned by individuals and used as a main residence throughout the period of ownership will receive a full exemption from CGT when the home is sold. 

Just about every homeowner is aware of the “main residence” rules exempting the family home from CGT, however most are less aware of the various circumstances that can limit the application of the exemption.

The rules surrounding the exemption are in fact quite complex and contain many traps. It pays to be aware of the main residence rules and to plan ahead accordingly.

Below we highlight three common scenarios in which a homeowner may face some CGT liability upon sale.

Using your home to generate income

If you use your residence to produce assessable income, you will generally only be eligible for a partial exemption from CGT.

This includes activities such as:

• Running a business from your home;
• Leasing the home to long-term tenants; and
• Renting the home – or even just a room – whether directly or through short-term sharing economy platforms such as Airbnb and Stayz.

The size of your CGT exemption will generally depend on how long you used the home to produce assessable income and the proportion of total floor space that this activity related to.

You may still be eligible for a full main residence exemption if you move out of the home before you start using it to produce income, and choose to continue treating the home as your main residence for CGT purposes. However, you can only choose to do this for a maximum of six years, and it means you cannot treat any other property you live in during that time as your main residence. If you use the home to generate income before you move out, you will not get a full exemption.

Homeowners who use their property to generate income should seek tax advice to understand the CGT implications for their specific circumstances.

Land greater than two hectares

Farmers and large property owners should be aware that the main residence exemption covers:

• Your dwelling (and the land directly beneath it); and
• Adjacent land used primarily for private or domestic purposes in association with the dwelling, provided the total area of the dwelling and adjacent land does not exceed two hectares.

This means a residential property (or a residential area of an income-producing farm) greater than two hectares will not be completely exempt from CGT.

In this case, the owner can choose which two hectares will attract the exemption and obtain an expert property valuation to substantiate the value of that selected area. If that two-hectare area cannot be separately valued, the exemption is calculated on a proportionate area basis.

Moving home

Moving home locally

When buying a new home and selling your old one, you generally have a six-month grace period in which both the old and new homes are treated as your main residence. However, if you are unable to sell your old home within six months of purchasing the new property, the main residence exemption only applies to both homes for the six months before you dispose of the old home. There will be an “excess” period beyond the six-month window that creates a CGT liability.

This works as follows:

• If you choose to claim the main residence exemption for your new home from the time you first move in, you will have a CGT liability to pay in respect of the old home when you sell it.
• Alternatively, you can choose to continue claiming the exemption for the old home until you sell it, which will not create an immediate CGT liability but will mean your new home only attracts a partial exemption when you eventually sell it.

Moving overseas

Currently both residents and non-residents are able to qualify for a full or partial exemption from CGT when they sell a property that they consider their principal place of residence.

In the 2017–18 Budget, the government announced changes to deny foreign residents’ access to the CGT main residence exemption. If legislation is passed, from 1 July 2019 foreign residents will no longer be entitled to claim the main residence exemption when they sell property in Australia. If the law is passed and you are a foreign resident at the time of the disposal of your Australian main residence, it will attract capital gains tax and will be taxed at the foreign resident marginal tax rates.

This is further impacted by the removal of the CGT discount of 50% which is no longer available to non-residents on Australian property as of 8 May 2012.

The change will apply to foreign residents as follows:

		Property sold
		Up until 30 June 2019	From 1 July 2019
Property acquired	Prior to 7:30pm (AEST) on 9 May 2017	Main residence exemption can apply	Main residence exemption no longer available
	At or after 7:30pm (AEST) 9 May 2017	Main residence exemption no longer available

The rules surrounding the main residence exemption are quite complex and contain many traps. Homeowners with circumstances that could affect their eligibility to use the main residence exemption should seek tax advice to understand the CGT implications for their specific circumstances and prepare for any possible CGT liability.