Typically, when you sell an asset, you must pay capital gains tax (CGT) on any profit you make on the sale.

For most of us, the most valuable asset we own is our family home, and with house prices heading upwards across large parts of the country, many of us stand to make a large profit if we sell.

So, does that mean that you must pay CGT when you sell your house?

Fortunately, the answer is generally no. The tax law provides an automatic exemption for any capital gain (or loss) which arises when a taxpayer sells their main residence.

However, this isn’t a blanket exemption. There remain situations where some or all of the gain from disposal of your main residence may be liable for CGT.

What does the phrase “main residence” actually mean? Where might the CGT exemption not be available?

What is my Main Residence?

In short, it’s your home.

The ATO has set out some prerequisites which it looks for when determining whether your property you have disposed of is your main residence. These include:

• Whether you and your family live there
• Whether you have moved your personal belongings into the home
• The address to which your mail is delivered.
• Your address on the electoral roll
• The connection of services and utilities (phone, gas, electricity, etc.)
• Your intention of occupying the dwelling.

There is no minimum time that you must live in a home before it can be considered your main residence, provided you tick all the boxes above, the property will qualify.

Note that, if you live on a large block, the CGT exemption usually only applies on land adjacent to the dwelling, up to a maximum of two hectares.

The main residence exemption can only apply to a property which includes a dwelling, i.e., anything that is used primarily for residential accommodation.

Examples of dwellings are: 

• a house or cottage
• an apartment or flat
• a strata title unit
• a unit in a retirement village
• a caravan, houseboat, or other mobile home

Simply owning land isn’t enough to claim the exemption, even if you intend to build a dwelling at a later date. However, in certain circumstances, you can choose to treat land as your main residence for up to four years before a dwelling is constructed. You can choose to have this exemption apply if you acquire land and you:

• build a dwelling
• repair or renovate an existing dwelling
• finish a partially constructed dwelling

There are a number of conditions you must satisfy before you can claim this exemption. You must first finish building/repairing/renovating the dwelling and then move into the dwelling as soon as practicable AND continue to live in the dwelling as your main residence for at least three months.

Can I Have More Than One Main Residence?

You can only ever have one main residence at any point in time. The exception is if you’re selling your old property and buying another. In this case you’re entitled to an overlap period of six months when both properties can be your main residence so long as:

• the new property will be your main residence after the sale of the old property:
• you lived in your old home as your main residence for a continuous period of at least 3 months in the 12 months before you disposed of it
• you did not use your old home to produce income (such as rent) in any part of that 12 months when it was not your main residence
• the new property becomes your main residence.

Can I Earn Rental Income from My Main Residence?

You do not need to live in the dwelling for the entire period of ownership for it to continue to qualify for the exemption.

If you own a property which is currently your main residence, you can move out of the property for up to six years and still get the exemption provided no other property becomes your main residence during your absence. 

During that time, you can earn rental income on the property and claim a tax deduction for expenditures as you would with a normal investment property. Providing you move back into the property before the end of the six-year period, and do not dispose of the property within the same financial year that the property was earning rental income, you can still qualify for the full exemption.

Does the Main Residence Apply to Property Renovators?

Yes, it does provided you occupy the renovated property as your main residence, even if only for a short period. If you purchase a property, occupy the dwelling while you are renovating it and then sell the property, any profit you make on the sale of the property is generally tax exempt, even if you then move into another property and repeat the process.

What if I Can No Longer Live in My Main Residence?

The main residence exemption may also apply where the owner is no longer able to reside in the dwelling if they have lost the ability to live independently and require full time care. This ensures that property owners who spend an extended period in hospital, must relocate to a residential care facility, or who relocate to live with a care giver, can still access the main residence exemption when they sell the property to pay living and medical expenses.