There are a number of rules and calculation methods that can apply to the main residence capital gains tax exemption. Of course, before they can be considered the property must be classified as a main residence.
The factors taken into account for a property to qualify as a residence include:
- The length of time you have lived there
- Whether your family live there
- Whether it is used as your mailing address
- Whether you have all of your personal possessions there
In the end one of the prime determining factors is your intention in occupying the property, which must be borne out by the facts.
There is no minimum time that must be met for a property to be classed as your main residence. This can mean when someone buys a property to live in, and after only a short period shifts interstate for personal reasons, as long as the property owner did not have another residence during this period the property will qualify for the CGT exemption.
One of the rules that does apply to the main residence exemption is that the property must be moved into as soon as practicable after its purchase. This can mean where there is a valid reason supported by the facts, such as illness or other unforeseen circumstances, the exemption will still apply if there is a delay between moving in and purchasing the property.
There is an area limit and two time limits that apply to the main residence exemption when it comes to land. The CGT residence exemption only applies on up to two hectares of land. For vacant land you have up to four years to class it as your main residence as long as during that time you construct a home and move into it as soon as practicable after its completion. Secondly the home must remain your residence for at least three months.
This can mean a person can have one main residence they live in while building a new home on land they have purchased. As long as the new home is constructed within the four years, and they live in the new home for at least three months, they will receive the main residence exemption for their original home and the new property.
There is another situation where the main residence exemption will apply to two properties for up to six months. This will occur when you purchase a new property, the original property was used as the main residence for a continuous period of three months over the previous 12 months of ownership, you don’t rent or produce income from the property during those 12 months, and you sell the original residence within six months of purchasing the new one.
Complications arise when a property is used as a main residence and for income producing purposes. As long as a person only has one residence that is not used to produce income, they can be absent from that residence indefinitely and still retain the main residence exemption. The exemption is still retained for a period of up to six years while the property is rented.
Normally when a property is first used as a residence and then is rented, capital gains tax is payable if the eventual selling price exceeds its market value when it ceased being a residence.
The exception is when the main residence exemption has been claimed when the owner was absent and has not had another main residence. In this situation the days that the property was a main residence, expressed as a percentage of the total days of ownership, is an exempt capital gain.