In some cases you can choose to have a dwelling treated as your main residence even though you no longer live in it. You cannot make this choice for a dwelling that you have not first occupied as your main residence.
Therese bought a house under a contract that was settled on 11 March 1993 and rented it out immediately. On 29 June 1996, she stopped renting it out and moved in.
Therese cannot choose to treat the house as her main residence during the period she was absent under the continuing main residence rule because the house was not her main residence before she rented it out. She will only be entitled to a part exemption if she sells the dwelling.
This choice needs to be made only for the income year that the CGT event happens to the dwelling; that is, the year that you enter into a contract to sell it. If you make this choice, you cannot treat any other dwelling as your main residence for that period (except for a limited time if you are changing main residences, see Moving from one main residence to another).
If you do not use it to produce income, you can treat the dwelling as your main residence for an unlimited period after you cease living in it.
If you do use it to produce income, you can choose to treat it as your main residence while you use it for that purpose for up to 6 years after you cease living in it. You are entitled to another maximum period of 6 years each time the dwelling again becomes, and then ceases to be, your main residence. If, as a result of you making this choice, the dwelling is fully exempt, the home first used to produce income rule does not apply.
If you are absent more than once during the period you own the home, the 6-year maximum period that you can treat it as your main residence while you use it to produce income applies separately to each period of absence.
Example: One period of absence of 10 years
Home ceases to be the main residence and is used to produce income for one period of 6 years
Lisa buys a house after 20 September 1985 but ceases to use it as her main residence for the 10 years immediately before she sells it. During this period, she rents it out for 6 years and leaves it vacant for 4 years.
Lisa chooses to treat the dwelling as her main residence for the period after she ceased living in it, so any capital gain or capital loss she makes on the sale of the dwelling is disregarded. The maximum period the dwelling can continue to be her main residence while it is used to produce income is 6 years. However, while the house is vacant, the period is unlimited, which means the exemption applies for the whole 10 years.
In addition to this, because the dwelling is fully exempt as a result of Lisa making this choice, the home first used to produce income rule does not apply.
Home used to produce income for more than one period totalling 6 years
In the 10-year period after Lisa stopped living in the dwelling she rents it 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.
If she chooses to treat the dwelling as her main residence for the period after she ceased living in it, any capital gain or capital loss she makes on selling it is again disregarded. This is because the total period the home was used to produce income during her absence is not more than 6 years.
End of example
Example: Home ceases to be the main residence and is used to produce income 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 1992
Ian was posted to Brisbane and bought another home there.
1 January 1992 to 31 December 1996
Ian rented out his Sydney home during the period he was posted to Brisbane.
31 December 1996
Ian sold his Brisbane home and the tenant in his Sydney home left.
The period of 5 years from 1992 to 1996 is the first period the Sydney home was used to produce income for the purpose of the 6-year test.
1 January 1997
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 1997
Ian again rented out his Sydney home-this time for 2 years.
28 February 1999
The tenant of his Sydney home left.
The period of 2 years from 1997 to 1999 is the 2nd period the Sydney home was used to produce income under the 6-year test.
31 December 1999
Ian sold his home in Melbourne.
31 December 2000
Ian returned to his home in Sydney and it again became his main residence.
28 February 2002
Ian sold his Sydney home.
Ian chooses to treat the Sydney home as his main residence for the period after he ceased living in it. The effect of making this choice is that any capital gains Ian made on the sale of both his Brisbane home in 1996-97 and his Melbourne home in 1999-2000 are not exempt.
Ian cannot obtain the main residence exemption for the whole period of ownership of the Sydney home because the combined periods it was used to produce income (1 January 1992 to 31 December 1996 and 1 March 1997 to 28 February 1999) total more than 6 years.
As a result, the Sydney house is not exempt for the period it was used to produce income that exceeds the 6-year period; that is, one year.
If the capital gain on the disposal of the Sydney home is $50,000, the amount of the gain that is taxable is calculated as follows:
1 July 1990 to 28 February 2002 |
4261 days |
1 January 1992 to 31 December 1996 |
1,827 days |
1 March 1997 to 28 February 1999 |
730 days |
Total |
2,557 days |
1 January 1992 to 31 December 1996 |
1,827 days |
1 March 1997 to 28 February 1998 |
365 days |
Total |
2,192 days |
Income producing for more than 6 years after Ian ceased living in it:
365 days
Proportion of capital gain taxable in 2001-02
$50,000 × (365 ÷ 4,261) = $4,684
Because Ian entered into the contract to acquire the house before 11.45 am on 21 September 1999 and entered into the contract to sell it after that time, and owned it for at least 12 months, he can use either the indexation or the discount method to calculate his capital gain.
Note-21 August 1996 important
The home first used to produce income rule does not apply because the home was used by Ian to produce income before 21 August 1996.
End of example