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  • 4 Your home

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    As a general rule, you can ignore a capital gain or loss you make from a CGT event that happens to a dwelling that is your main residence (also referred to as 'your home').

    To qualify for full exemption, the dwelling must have been your home for the whole period you owned it and must not have been used to produce assessable income. You may be entitled to a partial exemption if:

    • it was your main residence during only part of the period you owned it or
    • you used it to produce assessable income.

    Temporary absences from your home, such as annual holidays, do not affect your exemption.

    There are special rules for a dwelling you acquire as a beneficiary or a trustee of a deceased estate. These rules are explained under Inherited main residence.

    If you own more than one dwelling during a particular period, only one of them can be your main residence at any one time. The one exception to this rule can arise where you move from one main residence to another.

    You can choose that a particular dwelling be treated as your main residence even after you have moved out of it. This is explained in more detail in Continuing main residence status after moving out.

    There are situations where you may live in one dwelling while your spouse or a dependent child lives in another. In this case, you can nominate only one of the dwellings as your main residence.

    If you and your spouse each have different main residences at a particular time, you can each nominate different homes as qualifying for the exemption. In this situation, if you own 50 per cent or less of the home you have nominated, you qualify for an exemption for the interest you own. If you own more than 50 per cent of that home, your interest is exempt for only half the period claimed.

    The same applies to your spouse. If your spouse owns 50 per cent r less of the home they have nominated, your spouse qualifies for an exemption for their interest. However, if your spouse owns more than 50 per cent f that home, their interest is exempt for only half the period claimed.

    Example: Main residence

    John lives in a townhouse while his spouse, Pam, lives in their beach house. John's nominated home is the town-house and Pam's nominated home is the beach house.

    Pam and John each own 50 per cent of the beach house. John owns 70 per cent of the townhouse while Pam owns the other 30 per cent.

    Pam and John decide to sell the beach house. As it is Pam's home, her share of any capital gain or loss on the sale of the house is disregarded. John will pay tax on his share of any capital gain.

    If John and Pam decide to sell the townhouse, it is taken to have been John's main residence for half of the period of ownership.

    If the total capital gain on the sale of the townhouse is $10,000, the portion of John's share of the capital gain which is disregarded is $3,500 (70% × $10,000 × 50%).

    Pam's share of the capital gain is $3000 (30% × $10,000) and is subject to tax.

    End of example

    What is a dwelling?

    A dwelling can be any building or part of a building suitable for residential accommodation and may include:

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

    This list is not exhaustive. Any structure or place where people live or reside could be a dwelling.

    Any land or space immediately under the dwelling is included as part of the dwelling. Land under a unit of accommodation qualifies for the main residence exemption only if the land and the unit accommodation are sold together as a dwelling. Land adjacent to the dwelling may also qualify for exemption.

    What is an ownership interest?

    You have an ownership interest in a dwelling or land if:

    • In the case of a dwelling that is not a flat or homeunit, you have:
      • a legal or equitable interest in the land on which itis erected or
      • a licence or right to occupy it.
    • In the case of a flat or home unit, you have:
      • a legal or equitable interest in a strata title in the flat or home unit or
      • a licence or right to occupy the flat or home unit or
      • a share in a company that owns a legal or equitable interest in the land on which the flat or home unit is erected and that share gives you a right to occupy the flat or home unit.
    • In the case of land, you have:
      • a legal or equitable interest in it or
      • a right to occupy it.

    For the purposes of the main residence exemption, you have an ownership interest in a dwelling or land you acquire under a contract from the time you obtain legal ownership, unless you have a right to occupy it at an earlier time.

    You have legal ownership of a dwelling or land from the date of settlement of the contract of purchase until the date of settlement of the contract of sale. If the home is your main residence for the whole period between settlement of the contracts for purchase and sale - and you do not use it to produce assessable income - the home is fully exempt from capital gains tax.

    In calculating a capital gain or loss from a CGT event that happens to your home, for the main residence exemption the date of acquisition is usually different from the start of your ownership period. You are considered to have acquired the asset on the day you made the contract to acquire it rather than at the date of settlement. This is usually the day that you exchanged or otherwise executed the contract. You calculate a capital gain or loss from the date of acquisition.

    Is the dwelling your main residence?

    Factors that may be relevant in determining whether a dwelling is your main residence include:

    • the length of time you lived there – the capital gains tax legislation does not specify a minimum time that a person has to live in a home before it is considered to be their main residence; what is important is that it is your main residence
    • where your family lives
    • 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 – for example, telephone, gas or electricity
    • your intention in occupying the dwelling.

    A mere intention to construct a dwelling, or to occupy a dwelling as your main residence, without actually doing so, is not sufficient to obtain the exemption. In certain circumstances you may elect to treat a dwelling as your main residence even though you have ceased to occupy it. For more information read Continuing main residence status after moving out.

    Moving into a dwelling

    A dwelling is considered to be your main residence from the time you acquired your ownership interest in it if you moved into it as soon as practicable after its purchase. This means that, if there is a delay in moving because of illness or other reasonable cause, the exemption is still available from when you acquired your ownership interest.

    The exemption does not apply if you are unable to move into the dwelling because it is being rented out. It does, however, cover a period after the end of a previous tenancy if you could not take up residence immediately because the dwelling required repairs.

    Land adjacent to the dwelling

    The land adjacent to a dwelling is also exempt from capital gains tax if:

    • during the period you owned it the land is used mainly for private and domestic purposes in association with the dwelling and
    • the total area of the land around the dwelling, including the land on which it stands, is not greater than 2 hectares (4.94 acres). If the land used for private purposes is greater than 2 hectares, only2 hectares is exempt.

    Land is adjacent to your dwelling if it is close to or near the dwelling.

    Any part of the land around a dwelling used to produce income is not exempt, even if the total land is less than 2 hectares. However, the actual dwelling and any buildings and other land used in association with it remain exempt if you do not use them to produce income.

    Example: Land used for private purposes

    David bought a home with 15 hectares of land in November 1999. He uses 10 hectares of the land for income production and 5 hectares for private purposes.

    David sells the property and makes a capital gain of $15,000 of which $10,000 is attributable to the land and $5,000 to the house.

    David may claim the main residence exemption on the capital gain attributable to the house and on the following portion of the capital gain on the land:

    A × (B ÷ C)

    Where:

    A is capital gain on property

    B is land entitled to claim as being used for private purposes

    C is total area of land

    $10,000 × (2 ÷ 15) = $1,333

    End of example

    If part of the 2 hectares around the dwelling is used to produce income, the capital gain on which you have to pay tax is calculated as follows:

    A × (B ÷ C)

    Where:

    A is capital gain applicable to the total area of land and dwelling

    B is area of land used for income producing purposes

    C is total area of land surrounding the dwelling

    Example: Land used for income-producing purposes

    In January 2000, Shanti built a home on a 1.5 hectare block of land. She used 1 hectare of the land for market gardening and the rest for private purposes.

    If Shanti sells the land and home and makes a capital gain of $10,000, she will pay tax on the following amount.

    $10,000 × (1 ÷ 1.5) = $6,666

    End of example

    If you sell any of the land adjacent to your home separately from the home, the land is not exempt from capital gains tax. It is only exempt when sold with the home.

    Other structures associated with the dwelling

    A flat or home unit often includes areas such as a laundry, storeroom or garage that are physically separate from the flat or home unit. As long as these areas are used primarily for private or domestic purposes in association with the flat or home unit for the whole period you own it, they are exempt from capital gains tax on the same basis as the flat or home unit is exempt.

    If you dispose of one of the structures separately from the flat or home unit, it is no longer exempt and you may have to pay tax on any capital gain made when a CGT event happens.

    Subdivision of land around dwelling

    If you subdivide a block of land, each block that results is registered with a separate title. For capital gains tax purposes, the original land parcel is divided into 2 or more separate assets. Subdividing the land does not in itself change the ownership of the subdivided blocks. Therefore, you do not make a capital gain or a capital loss at the time of the subdivision.

    You may make a capital gain or loss when you sell the subdivided blocks. You are taken to have acquired the subdivided blocks when you acquired the original parcel of land. The cost base of the original land is, as far as is reasonable, included in the relevant cost bases of the subdivided blocks. You can usually make a reasonable apportionment of the cost of the land on the basis of its area if all the land is of a similar market value, or on the basis of relative market value if this is not the case.

    Example: Dwelling purchased before 20 September 1985 and land subdivided after that date

    Max bought a house in May 1983. He subdivided the land into 2 blocks in June 1999 and sold the rear block in October 1999.

    He is not liable to pay capital gains tax on the disposal of the rear block because he acquired it in May 1983 - that is, before 20 September 1985.

    End of example

     

    Example: Dwelling purchased before 20 September 1985, land subdivided after that date and house built on subdivided land

    In 1983, Mike bought a block of land that was less than 2   hectares. He subdivided the land into 2 blocks and built a house on the rear block in September 1999. He sold the house together with the land in October 1999 for $150,000. Mike obtained a valuation from a qualified valuer, who valued the rear block at $70,000 and the house at $80,000. The construction cost of the house was $65,000.

    As the new house was constructed after 19 September 1985 on land purchased on or before that date, the house is taken to be a separate asset from the land. Mike is taken to have acquired the rear block before 20 September 1985, so it is not subject to capital gains tax. Mike makes a capital gain of $15,000 ($80,000 − $$65,000) on disposal of the house because he did not use it as his main residence.

    As Mike did not own the house for at least 12 months he is ineligible for the 50 per cent CGT discount.

    End of example

     

    Example: Dwelling purchased after 19 September 1985 and land subdivided after that date

    Joan bought a house on a quarter acre block of land in June 1999 for $250,000. She lived in the house as her main residence. The house was valued at $80,000 and the land at $170,000. In January 2000 she subdivided the land into blocks of equal size. She incurred $10,000 in survey, legal and subdivision application fees and $1,000 to connect water and drainage to the rear block. In March 2000 she sold the rear block for $100,000.

    As she sold the rear block of land separately, the main residence exemption does not apply to the sale. Joan contacted several local real estate agents who advised her that the value of the front block was $15,000 higher than the rear block. She apportioned the $170,000 original cost base into $77,500 for the rear block (45.6%) and $92,500 for the front block (54.4%).

    The cost base of the rear block is calculated as follows:

    Cost of land

    $77,500

    45.6 per cent of the cost of survey, legal and application fees

    $4,560

    Cost of connecting water and drainage

    $1,000

    Total

    $83,060

    The capital gain on the disposal (CGT event A1) of the rear block is $16,940. Joan is not liable to pay capital gains tax when she sells the house and the front block because the house has been used as her main residence for all of the period she owned it.

    As Joan has not owned the land for at least 12 months prior to sale, she cannot apply indexation to the cost base nor can she claim the CGT discount.

    End of example

    Partial exemption

    Dwelling is your main residence for only part of the period you owned it

    If a CGT event happens in relation to a dwelling which you acquired on or after 20 September 1985 and that dwelling was not your main residence for the whole of the period you owned it, you get only a partial exemption.

    The capital gain on which you may have to pay tax is calculated as follows:

    A × (B ÷ C)

    Where:

    A is total capital gain made from the CGT event

    B is number of days in your ownership period when the dwelling was not your main residence

    C is total number of days in your ownership period

    Example: Main residence for part of the period of ownership

    Andrew bought a house on 1 July 1990 and moved in immediately. On 1 July 1993 he moved out and began to rent it. He sold it on 1 July 1999 and made a capital gain of $10,000. The amount of capital gain subject to tax is:

    $10,000 × (2,191 ÷ 3,287) = $6,666

    As Andrew sold the house prior to 11.45 am on 21 September 1999, he cannot claim the CGT discount but may apply indexation to the cost base.

    End of example

    Dwelling used to produce income

    You may have to pay tax on part of any capital gain you make on the disposal of a dwelling if:

    • you acquired it on or after 20 September 1985 and used it as your main residence
    • during all or part of the period you owned it you also used part of it to produce income and
    • you would be allowed a deduction for interest if you incurred it on money borrowed to acquire the dwelling.

    If you run a business or professional practice in part of your home, you are entitled to an interest deduction if you have part of the home set aside exclusively as a place of business, that part of the home is clearly identifiable as a place of business and it is not readily adaptable for private use - for example, a doctor's surgery located within the doctor's home. If you rent out part of your home, you would also be entitled to a partial interest deduction if you had borrowed money to acquire your home.

    The use of a home study to undertake work ordinarily done at your place of work but done at home for convenience would not affect the main residence exemption. Paid child-minding would also not affect the main residence exemption unless a special part of the home was set aside exclusively for that purpose.

    You will not have to pay capital gains tax if someone else uses part of your property for income producing purposes and you receive no income from that person.
    When a CGT event happens in relation to the home, the proportion of the capital gain on which you may have to pay tax is an amount that is reasonable having regard to the extent to which you would have been able to deduct the interest on money borrowed to acquire your home.

    In most cases the appropriate method of determining the extent that the interest would have been deductible is the proportion of the floor area of the home that is set aside for an income producing purpose and the period that the home is income producing.

    Example: Renting out part of a home

    Thomas purchased a home on 1 July 1995 and sold it on 30 June 2000. The home was his main residence for the entire 5 years.

    Throughout the period he owned it a tenant rented one bedroom, which represented 20 per cent of the home. Both Thomas and the tenant used the living room and kitchen, which represented 30 per cent of the home. Only Thomas used the remainder of the home. Therefore Thomas would be entitled to a 35 per cent deduction for interest if he had incurred it on money borrowed to acquire his home.

    Thomas made a capital gain of $20,000 when he sold the home. Of this total gain, he has to pay tax on the following proportion:

    Capital gain × % of floor area = Taxable portion

    $20,000 × 35% = $7,000

    End of example

     

    Example: Running a business in part of a home for part of the period of ownership

    Rachel bought her home on 1 January 1998 and sold it on 31 December 1999. It was her main residence for the entire 2 years.

    On 1 January 1999, halfway through her period of ownership, she began using part of the home to operate her photographic business. The rooms were modified for that purpose and were no longer suitable for private and domestic use. They represented 25 per cent of the total floor area of the home.

    When she sold the home, Rachel made a capital gain of $8,000. She had to pay tax on the following proportion of the gain:

    Capital gain × % of floor area × % of period of ownership = taxable portion

    $8,000 × 25% × 50% = $1,000

    End of example

    Home first used to produce income after 20 August 1996

    A special rule affects the way you calculate a capital gain if you use your main residence for income producing purposes.

    You are taken to have acquired the dwelling at its market value at the time it first becomes income producing if all of the following apply.

    • You acquired the dwelling on or after 20 September 1985 or you inherited a dwelling which the deceased person acquired on or after that date.
    • You first used the dwelling for an income producing purpose after 20 August 1996.
    • When a CGT event happens in relation to the dwelling you would get only a partial exemption because the dwelling was used to produce assessable income during the period you owned it.
    • You would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before you first used it to produce income.
    • If the dwelling passed to you as a beneficiary or a trustee of a deceased estate, the CGT event did not happen in relation to the dwelling within 2 years of the date of death of the person.

    In working out the amount of capital gain when the CGT event happens, the period before the dwelling becomes income producing is not taken into account. The extent of the exemption depends on the period and the proportion of the home used to produce income - see the following examples.

    If this special rule applies to a home which you have inherited from a deceased estate, you are considered to have acquired the home when it was first used to produce income.

    Example: Home first used to produce income after 20 August 1996

    Anne purchased a home in December 1991 for $200,000. The home was her main residence. On 31 December 1998 she started to use 50 per cent of the home for a consultancy business. At that time the market value of the house was $220,000. She decided to sell the property in December 1999 for $250,000. The capital gain is 50 per cent of the proceeds less the cost base.

    Percentage of use × (proceeds cost base) = capital gain

    50% × ($250,000 − $$220,000) = $15,000

    Anne is taken to have acquired the property in December 1998 at a cost of $220,000. As she owned it for less than 12 months when she disposed of it, there is no indexation of the market value nor is the CGT discount available.

    End of example

    Moving from one main residence to another

    If you acquire a new home before you dispose of your old one, both dwellings are treated as your main residence for up to 6 months if:

    • the old dwelling was your main residence for a continuous period of at least 3 months in the12 months before you disposed of it and you did not use it to gain or produce assessable income in any part of that 12 months when it was not your main residence
    • the new dwelling is to become your main residence.

    If you dispose of the old dwelling within 6 months of acquiring the new one, both dwellings are exempt from capital gains tax for the whole period between acquisition of the new one and disposal of the old one.

    If you disposed of your old home before 1 July 1998, both homes may be exempt from capital gains tax for only 3 months.

    Example: Exemption for both homes

    Gabrielle and David bought and moved into their new home on 1 January 2000. They sold their old home on 15 April 2000. Both the old and new homes are treated as their main residence for the period 1 January to 15April even though they did not live in the old home during that period.

    End of example

    If it takes longer than 6 months to dispose of your old home, both homes are exempt only for the last 6 months before the disposal. You get only a partial exemption when a CGT event happens in relation to your old home.

    Example: Partial exemption for your first home

    Colleen and John bought and moved into their first home on 1 January 1996. It was their main residence until they bought their second home on 1 January 1999. They retained the first home after moving into the new one but did not use it to produce income. They sold the first home on 30 September 1999. They owned this home for a total period of 45 months.

    Both homes are treated as their main residence for the period 1 April 1999 to 30 September 1999, the last 6 months of ownership. Therefore, their first home qualifies as their main residence only for the period before they moved into their new home and during the last 6 months before its sale. The 3 months from 1 January 1999 to 30 March 1999, when it was not their main residence, is taken into account in calculating how much of any capital gain they made is taxable. In this case, three forty-fifths (3/45) of any gain is subject to capital gains tax. Colleen and John can choose to either reduce the gain by the 50 per cent CGT discount or calculate the gain using the frozen indexation method.

    End of example

    Continuing main residence status after moving out

    In some cases you can choose to have a particular dwelling treated as your main residence even though you cease to use it as such. This choice only needs to be made in the income year that the CGT event happens to the dwelling.

    If you do not use it to produce income, you can treat the dwelling as your main residence for an unlimited period after you move out of it.

    If you do use it to produce income after you move out, the total period of income producing use cannot be more than 6 years for any period you are absent. This can consist of one or more smaller periods of income producing use which total up to 6 years.

    Example: One period of absence of 10 years

    Income producing use for one period of 6 years

    Elizabeth buys a house after 19 September 1985 but ceases to use it as her main residence for the last 10 years before she sells it. During this period she rents it out for 6 years and leaves it vacant for 4 years.

    Any capital gain or loss Elizabeth makes on the sale of this dwelling is disregarded. The maximum period that the dwelling can continue to be her main residence while income producing is 6 years but, while it is vacant, the period is unlimited. Therefore the exemption applies for the whole 10 years.

    Income producing use for more than one period totalling 6 years

    If Elizabeth rents the dwelling out for 3 years, leaves it vacant for 2 years, rents it out for the next 3 years, then once more leaves it vacant for 2 years, any capital gain or loss she makes on selling it is again disregarded.

    This is because the total period of income producing use during this absence does not exceed 6 years.

    End of example

    If you are absent more than once during the period you own your home, the 6-year period of income producing use applies separately to each period of absence. However, your home must again become your main residence after each period of absence.

    If you make this choice, no other dwelling can be treated as your main residence unless you are moving from one main residence to another. See page 31 for more information.

    Example: Income producing use for more than 6 years during a single period of absence

    1 July 1990

    Ian bought a home in Sydney and used it as his main residence

    1 January 1991

    Ian was posted to Brisbane for 2 years and bought another home there.

    1 January 1991 to 31 December 1995

    Ian rented out his Sydney home during the period he was posted to Brisbane.

    31 December 1995

    Ian sold his Brisbane home and the tenant in his Sydney home left.

    These 5 years constitute the first period of income producing use of the Sydney home for the purpose of the 6-year test.

    1 January 1996

    Ian was posted from Brisbane to Melbourne for 3 years and bought a home in Melbourne. He did not return to his Sydney home.

    1 March 1996

    Ian again rented out his Sydney home – this time for 2 years..

    28 February 1998

    The tenant of his Sydney home left.

    The 2 years from 1996 to 1998 constitute the second period of income producing use of the Sydney home for the purposes of the 6-year test. The combined periods of income producing use are now 7 years because Ian's Sydney home did not become his main residence at any time between the 2 periods that it was producing income.

    31 December 1998

    Ian sold his home in Melbourne.

    31 December 1999

    Ian returned to his home in Sydney and it again became his main residence.

    28 February 2000

    Ian sold his Sydney home.

    Ian cannot choose to have his Sydney home treated as his main residence for the whole period of ownership because the combined periods of income producing use - 1 January 1991 to 31 December 1995 and 1 March 1996 to 28 February 1998 - are more than 6 years. As a result, his Sydney home is not exempt from capital gains tax for the period of income producing use that exceeds the 6-year period - that is, one year.

    If the capital gain on the disposal of the Sydney home is, say, $50,000, the amount of that gain subject to tax is calculated as follows:

    Period of ownership of the Sydney home

    1 July 1990 to 28 February 2000

    3,530 days

    Period of income producing use of the Sydney home

    1 January 1991 to 31 December 1995

    1,826 days

    1 March 1996 to 28 February 1998

    731 days

    Total

    2,557 days

    First 6 years of income producing use of the Sydney home

    1 January 1991 to 31 December 1995

    1,826 days

    1 March 1996 to 28 February 1997

    365 days

    Total

    2,191 days

    Income producing use more than 6 years – 366 days

    Proportion of capital gain subject to tax and payable in 1999-2000

    (366 ÷ 3,530) × $50,000 = $5,184

    Ian can choose either to reduce this gain by the 50 per cent CGT discount (after applying any capital losses) or calculate the gain using the frozen indexation method.

    In addition Ian would have paid tax on any capital gains he made on the sale of both his Brisbane home in 1995-96 and his Melbourne home in 1998-99.

    End of example

    Income producing use during a period of absence

    You can ignore any income producing use of your home during any period of absence up to a maximum of 6 years while you continue to treat it as your main residence. This does not apply if the home was partly used to produce income before and during the period of absence.

    Example: Part of the home used to produce income while a main residence and the home later used to produce income during a period of absence

    Tanya purchased a home on 1 July 1991 and moved in immediately. She used 75 per cent of the home as her main residence and the remaining 25 per cent as a doctor's surgery, which she used until 30 June 1994. On 1 July 1994 she moved out and began to rent out the home.

    The home was rented until it was disposed of on 30 June 2000. Tanya chose to treat the dwelling as her main residence for the 6 years during which the house was rented out. She made a capital gain of $10,000 when the home was sold.

    As 25 per cent of the home was income producing both before and after her absence, Tanya is liable to pay tax on a portion of the capital gain, calculated as follows:

    $10,000 × 25% = $2,500.

    Tanya can choose either to reduce the gain by the 50 per cent CGT discount (after applying any capital losses) or calculate the gain using the frozen indexation method.

    End of example

    Construction of a dwelling on land you already own

    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, or 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.

    Example: 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 from3 September 1996
    • He may claim the exemption for his old home from3 November 1991 to 2 September 1996.

    However, both homes are exempt from 1 April 1999 to 1 October 1999, the date of disposal of the old home. This is because the maximum 6-month exemption outlined in the section Moving from one main residence to another.

    End of example

    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:

    • 4 years before your death or
    • the period starting when you acquired the interest in the land and ending when you die.

    Destruction of dwelling and sale of land

    If your home is accidentally destroyed and you then dispose of the vacant land on which it was built, you can choose to treat the disposal of the land as a disposal f your main residence.

    If you make this choice, the land is subject to the main residence exemption from the time your home was destroyed until you dispose of it. During this period you cannot claim the main residence exemption for any other dwelling unless the exemption described in Moving from one main residence to another applies.

    Major capital improvements to a dwelling acquired before 20 September 1985

    If you acquired a dwelling before 20 September 1985 and you make major capital improvements after that date, part of any capital gain made when a CGT event happens in relation to the dwelling could be subject to capital gains tax. Even though you acquired the dwelling before the operation of capital gains tax, major capital improvements are taken to be separate CGT assets from the original asset and are subject to capital gains tax in their own right.

    If the dwelling is your main residence and the improvements are used as part of your home, they are still exempt. This includes improvements on land adjacent to the dwelling - for example, installing a swimming pool - if the total land including the land on which the home stands is 2 hectares or less.

    However, if the dwelling is not your main residence or you put the improvements to some income producing use, you may have to pay capital gains tax on any gain that is attributable to the improvements.

    A capital improvement is taken to be major if its original cost - indexed for inflation - is more than 5 per cent of the amount you receive when you dispose of the asset and is also over a certain threshold. The threshold increases every year to take account of inflation.

    Improvement thresholds for 1985-86 to 1999-2000

    Income year

    Threshold ($)

    1985-86

    50,000

    1986-87

    53,950

    1987-88

    58,859

    1988-89

    63,450

    1989-90

    68,018

    1990-91

    73,459

    1991-92

    78,160

    1992-93

    80,036

    1993-94

    80,756

    1994-95

    82,290

    1995-96

    84,347

    1996-97

    88,227

    1997-98

    89,992

    1998-99

    89,992

    1999-2000

    91,072

    When you dispose of the dwelling the capital gain on the major improvements is calculated by taking away the cost base of the improvements, indexed for inflation, from the proceeds of the sale that are reasonably attributable to the improvements.

    Capital gain on major improvement = proceeds of sale attributable to improvement − cost base of improvements indexed for inflation

    In calculating the amount of capital proceeds attributable to the improvements, you must take whatever steps are appropriate to determine their value. If you make an estimate of this amount you must be able to show how you arrived at the estimated figure.

    Example: Improvement on land bought before 20 September 1985

    Martin bought a home in 1984. On 1 December 1993 he undertook major capital improvements worth $85,000. He sold the home on 1 December 1999 for $500,000. At the date of sale, the cost base of the improvements - after indexation - was $95,370. Of the $500,000 he received for the home, $100,000 was attributable to the improvements.

    Test 1

    Is the cost base of the improvements more than 5 per cent of $500,000 – that is, $25,000

    Yes

    Test 2

    Is the cost base of the improvements more than the 1999-2000 threshold of $91,072

    Yes

    As the answer to both questions is Yes, Martin is subject to capital gains tax on the gain attributable to the improvements. The gain is calculated as follows:

    Amount of proceeds attributable to the improvement

    $100,000

    Less cost base of improvements indexed for inflation

    $95,370

    Taxable capital gain

    $4,630

    If the home was Martin's main residence, he does not have to include this gain in his tax return. If he had put the home to some income producing use at any time between undertaking the improvements and selling the home, a proportionate amount of the gain would have been taxable. For example, if the home had been rented out for one-third of the period, then one-third of the gain would have been taxable - assuming that he did not or cannot continue to treat the home as his main residence.

    As Martin sold the home after 11.45am on 21 September 1999 and had held it for at least 12 months, he could claim the CGT discount rather than choose indexation of the cost base.

    End of example

    Inherited main residence

    If you inherit a deceased person's main residence, you may be exempt or partially exempt from capital gains when a CGT event happens in relation to the home. The same exemptions also apply if you are the trustee of the deceased's estate and a CGT event happens.

    Full exemption

    Deceased died before 20 September 1985

    You are not subject to capital gains tax if you dispose of the home, because you acquired it before 20 September 1985.

    Deceased died on or after 20 September 1985

    (a) The deceased acquired the dwelling before 20 September 1985.

    The dwelling would have been exempt from capital gains tax if the deceased person had disposed of it, whether it was their main residence or not.

    If you have an ownership interest in a dwelling that passes to you as a beneficiary in a deceased estate or you own it as trustee of a deceased estate, any capital gain or loss you make from a CGT event that happens in relation to the dwelling is disregarded if any of the following applies.

    1. Your ownership interest ends on or before 20 August1996 and within 12 months of the person’s death.
    2. Your ownership interest ends after 20 August 1996 and within 2 years of the person’s death. This applies whether or not you used the dwelling to produce income during the 2-year period. The dwelling does not have to be your main residence during the 2-year period.
    3. From the deceased’s death until your ownership interest ends, the dwelling was not used to gain or produce income and it was also the main residence of one or more of:
      • the spouse of the deceased immediately before death – but not a spouse who was permanently separated
      • an individual who had a right to occupy the home under the deceased’s will
      • you as a beneficiary if you are disposing of the dwelling as a beneficiary.

    (b) The deceased acquired the dwelling on or after 20 September 1985.

    Any capital gain or loss you make when a CGT event happens in relation to a dwelling or ownership interest in a dwelling you inherit will be disregarded if:

    • one of the conditions 1, 2 or 3 in (a) above is met and
    • the dwelling passed to you as beneficiary or executor on or before 20 August 1996, the deceased used the home as their main residence from the date of acquisition of their ownership interest until their death and did not use it to gain or produce income or
    • the home passed to you as beneficiary or trustee after 20 August 1996, it was the deceased’s main residence just before the date of death and was not being used at that date to produce income.

    A dwelling can still be regarded as their main residence even if the deceased was not living in it - for example, if the person moved to a nursing home and had rented out the home for less than 6 years at the time of death. The deceased may have elected, r the executor may elect, that the home remain the main residence during the period of absence.

    However, if a home is being used to produce income as well as being lived in, it is taken to have been used for producing income.

    Example

    Roger was the sole occupant of a home which he bought in April 1990 that is, after 20 September 1985. He did not live in or own another home. He died in January 1999 and left the house to his son, Peter. Peter rented out the house and then disposed of it 15 months after his father died. Peter is entitled to a full exemption from capital gains tax on the disposal f this house as he disposed of it within 2 years of his father's death.

    If the home had passed to Peter on or before 20 August 1996, he would not have been fully exempt as it was not sold within 12 months of his father's death and was not Peter's main residence.

    End of example

    Part exemption

    If you do not qualify for a full exemption from capital gains tax for the home you may be entitled to a partial exemption.

    You calculate your capital gain or loss as follows:

    Capital gain or loss amount × (Non-main residence days ÷ Total days)

    Non-main residence days - the days that the dwelling was not the main residence - is the sum of:

    • if the deceased acquired the dwelling on or after 20 September 1985, the number of days in the deceased’s period of ownership when the dwelling was not their main residence and
    • the number of days in the period from the death until you dispose of the dwelling that it was not the main residence of
      • the spouse of the deceased – except a spouse who was permanently separated
      • an individual who had a right to occupy the dwelling under the deceased’s will or
      • you as a beneficiary.

    If the deceased acquired the ownership interest before 20 September 1985, total days is the number of days from the death until your ownership interest ends.

    If the deceased acquired the ownership interest on or after 20 September 1985, total days is the number of days in the period from the acquisition of the dwelling by the deceased until your ownership interest ends.

    If you dispose of the home on or before 20 August 1996, a partial exemption is not available if the dwelling was never the main residence of the deceased.

    If the property passes to you after 20 August 1996 and the dwelling was the deceased's main residence just before death and was not income producing at that time, any days before their death that it was not their main residence are ignored for the purposes of calculating a capital gain.

    If your ownership interest in the dwelling ends within 2 years of the person dying, you can ignore any period it was not your main residence and ignore the total days in the period from death until you dispose of the dwelling if this lessens your tax liability. If the disposal was on or before 20 August 1996, you apply this rule only if you dispose of the dwelling within 12 months of the person dying.

    Example

    Enid bought a house on 12 February 1994 that she used solely as a rental property. When she died on 17 November 1997, the house became the main residence of her beneficiary, Pamela. Pamela disposed of the property on 27 November 1999.

    As Enid had never used the property as her main residence, Pamela cannot claim a full exemption from capital gains tax. However, as Pamela used the house as her main residence and disposed of it after 20 August 1996, she is entitled to a partial exemption from capital gains tax. Enid owned the house for 1375 days and Pamela then lived in the house for 740 days, a total of 2115 days. Assuming that there was a gain of $10,000 on disposal then Pamela would only include a gain of $6,501 ($10,000 × (1,375 ÷ 2,115)).

    As Pamela sold the property after 11.45 am on 21 September 1999 and held the property for at least 12 months, the capital gain (after applying capital losses) may be reduced by the 50 per cent CGT discount.

    End of example

     

    Example

    Aldo bought a house in March 1995. He moved into a nursing home in December 1996 and rented out his house. He elected that it continue to be treated as his main residence. Aldo died in February 2000 and the house passed to his beneficiary, Frank, who uses the house as a rental property.

    Aldo rented out the house for less than 6 years. As the house was his main residence immediately before his death, Frank is considered to have acquired the house at the time of Aldo's death for a consideration equal to its market value.

    If Frank continues to rent the house and disposes of it more than 2 years after Aldo's death, the capital gain for the period from the date of Aldo's death is subject to tax.

    End of example

    Cost to you of acquiring the dwelling

    If you inherit a dwelling which the deceased acquired on or after 20 September 1985, there are rules for calculating the acquisition cost. These rules apply in calculating any capital gain or loss when a CGT event happens in relation to the dwelling.

    Generally, when you inherit an asset, the first element of the asset's cost base or reduced cost base in your hands - the amount you are taken to have paid to acquire the asset - is the cost base or reduced cost base to the deceased on the date of death. The first element also includes amounts that would have been included in the cost base or reduced cost base in the hands of the trustee of the deceased's estate.

    However, the first element of both cost base and reduced cost base is the market value at the date of death in either of the following circumstances:

    • The dwelling was acquired by the deceased before20 September 1985.
    • The dwelling passes to you after 20 August 1996, it was the main residence of the deceased immediately before their death and it was not being used at that date to gain or produce income.

    Note that, even though the deceased was not living in the home at the date of death, it may still be regarded as their main residence.

    Death during construction

    If an individual dies:

    • after entering into a contract to begin construction of a home on land they owned and
    • before they had lived in the home for 3 months

    the executor may choose that the home and land be regarded as the deceased's main residence for up to 4 years before construction was completed, provided the deceased did not have another main residence during that time. See Inherited main residence for the circumstances in which an executor can make this choice.

    Acquisition of a dwelling from a company or trust upon marriage breakdown

    If a dwelling is transferred to you from a company or trustee of a trust under a court order as a result of your marriage breakdown, you are treated as having owned the dwelling while it was owned by the company or trustee. However, it cannot be treated as your main residence during any part of the period that the company or trustee owned it. Therefore, if a dwelling is transferred to you by a company or trustee, you will be entitled only to partial exemption. This is calculated by dividing the period after the transfer during which it is your main residence by the total period of ownership.

    Last modified: 18 Sep 2009QC 18323