Principal Place of Residence CGT Exemption

The recent increases in housing prices make it more important than ever to ensure you home is fully protected from Capital Gains Tax (CGT) by your main residence exemption.

Afterall CGT is really just a tax on inflation. 

If your home misses out on the exemption you are unlikely to have enough left to buy another home after you pay the tax. 

These are the traps to watch out for.

• You need to have a dwelling on the land for the main residence exemption to apply to the land except if it has been accidentally destroyed.  So, if you end up say subdividing off the back yard you are still going to need all your records and CGT will apply to that sale.
• If you build your home with the intention of selling it for a profit then even though you live there it will be considered sale proceeds from the business of building homes so no main residence exemption.
• If you are living overseas when you sell your home your main residence exemption will be lost for the whole time you owned the property, even when you were living in it before you went overseas
• If you use the property to produce income while you are living there then only part of it can be covered by your main residence exemption.
• If you are no longer living in the property you can continue to cover it with your main residence exemption as long as you are not covering another property.  But if you are earning income from the property in your absence ie renting it out, then you can only cover it for up to 6 years at a time.  The 6 years resets if you live in it again an move out again.  You cannot cover another property with your main residence exemption during this 6 years.
• If the home is not owned by someone who is living there then it can’t be covered by their main residence exemption with the exception of spouses living separately.  Note if you have a child under 18 living there then you can cover it with your main residence exemption even if you are not.    Further, if the property is owned by a company or trust it cannot be covered by the main residence exemption unless the trust is a bare trust.
• Make sure you move into your home straight after settlement or part of the capital gain on the property will be subject to tax and it is the record keeping that is more of a problem than the tax in these circumstances.  Note in very limited circumstances you can cover your old home and your new home both with your main residence exemption for up to 6 months.
• Spouses are only entitled to one main residence exemption between them.  They can choose to cover half of their individual houses but the best choice is to combine to cover the one with the highest capital gain. 

Capital gains tax will not apply to a home that you purchased before 20^th September, 1985 but be prepared.  If you own that property with someone else and they die after 19^th September, 1985 and leave their half to you then that half will need your main residence exemption to be protected from CGT from their date of death. 

Additional resources: If you like this article, make sure to check out Julia’s episode on The Property Couch here >> Episode 349 | How To Avoid Paying Tax Without Going To Prison! – Chat with Julia Hartman