The primary residence exemption is one that releases capital gains tax (CGT) from your family house when you sell it. Like other tax-related issues, it is not always a clear-cut though. 

As Darryl Kerrigan from the movie The Castle famously said, “It’s not a house. It’s a home,” and the Australian Taxation Office’s (ATO) definition of a principal residence fits really well here.

 

What would be Considered a Main Residence?

Usually, a house must satisfy certain conditions before it can be deemed your principal residence:

• Living Arrangement: You and your family reside here.
• Personal Belongings: Your personal items have been placed inside the house.
• Mail Delivery: Your mail is delivered here.
• Electoral Roll: Your address shows on the electoral register.
• Utilities: Services like phone, gas, and electricity are linked to your name.
• Intention: Your objective is for the house to serve as your primary residence.

Although the length of stay in the house is noteworthy, every circumstance is different, and the purpose of the house should come first over the amount of time you have stayed there.

 

When Does the Main Residence Exemption Apply?

Generally speaking, CGT covers the sale of your house unless you have an exemption, partial exemption, or may balance the tax against a capital loss. Should you be an Australian resident for tax purposes, the entire primary residence exemption will be available should you sell your house if:

• Residency: For the whole time you owned your house, it was your primary residence.
• Income Generated: You did not generate any revenue from your house.
• Land Size: Your house sits on two hectares or less. Should your house be on more than two hectares, for instance, on agricultural property, the exemption will apply to the house and up to two hectares of surrounding land.

Partial Exemption

You may not be able to claim the entire primary residence exemption if you have used your house to generate income, but a partial exemption might still be possible. 

Typical situations affecting your primary home exemption include:

• Running a Business from Home: This does not usually involve working from home.
• Renting Out Part of the Home: Renting means either all or part of it.

Under these circumstances, that portion of the house is probably liable for CGT from the moment you began using it to generate revenue. Platforms like Airbnb also have to notify the ATO of all transactions every six months, starting on July 1, 2023. The income reported on tax returns will be matched using this information.

Foreign Residents and Changing Residency

Even if they were residents for a portion of the period they held the property, foreign residents cannot receive the principal residence exemption. You are unlikely to be eligible to use the primary residence exemption if, at the time you signed the contract to sell the house, you were not a resident. 

On the other hand, should you be a resident at the time of the sale and satisfy the other qualifying conditions, the regulations should normally apply even if you were a non-resident for a portion of the ownership period. An expatriate who keeps their primary home in Australia, for instance, may return to Australia, become a resident for tax reasons once again, and then sell the house, therefore perhaps qualifying for the main residence deduction.

The residency test is based on your tax residence, not your visa situation. Australia’s tax residence laws may be complicated; hence, if you are unsure, it is important to see a tax specialist to help you work through the laws. 

Can the Main Residence Apply Even If you Move Out?

The “absence rule” lets you keep your house as your primary residence for tax reasons.

• Up to 6 years: If the house generates revenue, say by renting it while you are away, then so too.
• Indefinitely: If it is not used to generate revenue.

Using the absence rule usually helps you avoid using the primary residence exemption on any other property you own at the same time. Apart from a few exclusions, the other property is liable to CGT.

Assume you went abroad in 2020 and let someone rent your house while you were away. Then you moved back into your home after returning to Australia in 2023. Early in 2024, you decided to sell it. You chose to apply the absence rule to your house and neglected to regard any other property as your primary residence throughout that time. 

Assuming you are a resident for tax purposes at the time of sale, in this situation, you should be able to obtain the entire primary home exemption.

If you rebuild the property as your primary home and then subsequently quit living there, the six-year term resets. Therefore, if the period during which the house was income-generating is restricted to six years for each absence, it is probable the entire primary residence exemption will be available, provided the other qualifying standards are fulfilled.

 

Timing

Usually, from the time you move in and start living there, your house is your primary abode. That house is regarded as your principal residence from the day you got it, only if you move in as soon as practical after the contract’s settlement date.

Should you purchase a new house but have not yet sold your previous one, you may consider both homes as your primary residence for up to six months without compromising your eligibility for the main residence exemption. 

This is true should the old house have been your primary residence for three months in the year before you sold it and you did not utilise it for revenue during any portion of that year when it was not your main residence.

Should the sale take more than six months, and if qualified, the primary residence exemption may apply to both residences only for the final six months before the old house is sold. Any time prior to this might allow you to decide which house you mostly live in (the other becomes liable for CGT).

The house is not your primary residence until you move in if your new house is leased to someone else when you buy it and you cannot move in. Should you find yourself unable to move in for any unanticipated circumstance—such as hospitalisation or an overseas job posting—you may still be eligible for the principal residence exemption from the moment you purchase the house. You will need proof to back up your stance; convenience is not a good justification.

 

Could a Couple Have Separate Main Residences?

The laws do not let you claim the entire CGT exemption on both properties if you and your partner possess separately established homes as your principal residences. 

 

Instead, you can:

• Select one of the homes: As your primary abode throughout the term, both of you.
• List many homes: Your primary abode throughout the time.

 

Should you and your partner choose separate homes, the exemption is shared between you:

• In the event that you own 50% or less of the chosen primary house, it will be deemed your main residence and qualified for the main residence deduction.
• Should you own more than half of the house you have selected as your primary residence, the housing is deemed your main residence for half the duration you and your partner were living elsewhere.

 

Your spouse follows the same guidelines. Whether single ownership, tenants in common, or joint tenants, this provision applies to any house the couple possesses, regardless of formal title.

 

What Transpires in a Divorce?

Assuming the house is transferred to one of the spouses (and not to or from a trust or company), both individuals used the home only as their main residence over their ownership period, and the other eligibility conditions were met; a full main residence exemption should be available when the property is finally sold.

Should the house be eligible for the principal residence exemption for just a portion of the ownership term for each person, a partial exemption might be sought. When the couple finally sells the property, the spouse who is getting it might have to pay CGT on the gain on their portion of the property settlement.

 

Complexity and Compliance

Although the principal home exemption seems straightforward enough, it may soon become complicated. A “vibe” is insufficient for effectively negotiating the exception. Negotiating the complexities of the primary home exemption calls for a thorough knowledge of the guidelines and their applicability to your particular situation. 

If you have any questions related to CGT or property tax, speak to a tax expert at Bates Cosgrave to help guarantee compliance and maximise the benefits under this exemption.