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If you build a dwelling on land that you already own, the land does not form part of your main residence until the dwelling is constructed. However, you may be able to treat the land as if it was part of your main residence for a period of up to 4 years before the dwelling becomes your main residence. This has the effect of exempting the land from capital gains tax for the period both before and after construction of the dwelling.
You can choose to have this exemption apply when you acquire an ownership interest - other than a life interest - in land and you:
- build a dwelling on the land or
- repair or renovate a pre-existing dwelling on the land or
- complete a partly erected dwelling on the land.
There are a number of conditions which must be satisfied before you can claim the exemption.
- You must erect or complete the erection of the dwelling or complete its repair or renovation.
- You must then:
- move into the dwelling as soon as practicable after it is erected or completed, r the repair or renovation is completed and
- continue to use the dwelling as your main residence for at least 3 months.
The exemption applies for the shorter of the following periods:
- the 4-year period immediately before the date on which the dwelling becomes your main residence or
- the period between the dates you acquired the ownership interest in the land and the dwelling becomes your main residence.
The period of exemption usually starts from the date you acquired the ownership interest in the land. However, if there was already a dwelling on the land when you acquired it and you or someone else lived in it after that time, the period of exemption starts from the date that the dwelling was vacated.
If you choose to have this exemption, you cannot treat any other dwelling as your main residence during the same period. The exception to this is outlined in Moving from one main residence to another.
Therefore, if you have a dwelling which you acquired on or after 20 September 1985 and you live in it while you build your new home, you must decide whether to:
- maintain the exemption for your old home or
- have the exemption apply to the land for the shorter of:
- the time from which you acquire the ownership interest in the land until the new home becomes your main residence and
- the 4-year period immediately before the date on which the new home becomes your main residence.
You cannot choose to have a shorter period of exemption for the new home in order to exempt the old home for part of the construction period.
Choosing to claim exemption for land from the date of construction
On 3 September 1996, Grant bought vacant land on which to build a new home. This was intended to replace his old home that he bought on 3 November 1991.
Grant completed construction of his new home on 8 September 1999. He moved into it on 7 October 1999, which was as soon as practicable after completion. He sold his old home on 1 October 1999.
If Grant chooses to claim the exemption:
- He will treat the new home as his main residence from 3 September 1996.
- He may claim the exemption for his old home from 3 November 1991 to 2 September 1996.
However, both homes are exempt from 1 April 1999 to 1 October 1999, the date of disposal f the old home. This is because the maximum 6-month exemption outlined in the section Moving from one main residence to another.
If you were to die at any time between entering into contracts for the construction work and the end of the first 3 months of residence in the new home, this exemption can still apply.
If you owned the interest in the land as a joint tenant and you die, the surviving joint tenant or, if none, the trustee of your estate can choose to treat the land and building as your main residence for the shorter of:
Last modified: 18 Sep 2009QC 18323
- 4 years before your death or
- the period starting when you acquired the interest in the land and ending when you die.