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  • Chapter 6 - Real estate and main residence

    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

    This chapter explains your capital gains tax (CGT) obligations for real estate. Real estate includes vacant blocks of land, business premises, rental properties, holiday houses and hobby farms. The CGT exemption for a main residence is also explained in this chapter.

    Apart from the main residence rules, capital gains and capital losses on real estate are worked out under the rules set out earlier in this guide.

    Land is a CGT asset. In some cases improvements made to land are treated as separate CGT assets - see Separate assets. A depreciating asset that is found in a building (for example, carpet or a hot water system) is also taken to be a separate CGT asset from the building. When a CGT event happens to your property you must work out a capital gain or capital loss for each CGT asset it comprises (or balancing adjustment in the case of depreciating assets sold with the property).

    The most common CGT event that happens to real estate is its sale or disposal - CGT event A1. The time of the event is:

    • when you enter into the contract for the disposal
    • if there is no contract - when the change of ownership occurs, or
    • if the asset is compulsorily acquired by an entity - the earliest of
      • when you received compensation from the entity
      • when the entity became the asset's owner
      • when the entity entered it under a power of compulsory acquisition, or
      • when the entity took possession under that power.
       

    If land is disposed of under a contract, it is taken to have been disposed of when the contract is entered into - not the settlement date. The fact that a contract is subject to a condition, such as finance approval, will generally not affect this date.

    You are not required to include any capital gain or capital loss on your tax return for the relevant year until an actual change of ownership occurs. When settlement occurs, you must include any capital gain or capital loss in the year of income in which the contract was made. If an assessment has already been made for that year of income, you may need to have that assessment amended.

    New terms

    We may use some terms that are new to you. These words are explained in Definitions. Generally they are also explained in more detail in the section where they first appear.

    Rules to keep in mind

    There are a few rules to keep in mind when you calculate your capital gain or capital loss from real estate, in particular rules relating to:

    • the non-capital costs of ownership, and
    • cost base adjustments for capital works deductions.
    Non-capital costs of ownership

    You do not include rates, insurance, land tax, maintenance and interest on money you borrowed to buy the property or finance improvements to it in the reduced cost base. You only include them in the cost base if:

    • you acquired the property under a contract entered into after 20 August 1991 (or if you didn't acquire it under a contract, you became the owner after that date), and
    • you could not claim a deduction for the costs because you did not use the property to produce assessable income - for example, it was vacant land, your main residence or a holiday home during the period.
    Cost base adjustments for capital works deductions

    In working out a capital gain for property that you used to produce assessable income - such as a rental property or business premises - you may need to exclude capital works deductions you claimed, or were entitled to claim, from the cost base and reduced cost base.

    For information on when property (for example, a building, structure or other capital improvement to land) is treated for CGT purposes as a CGT asset separate from the land, see chapter 1 and Major capital improvements to a dwelling acquired before 20 September 1985.

    You must exclude from the cost base of a CGT asset (including a building, structure or other capital improvement to land that is treated as a separate asset for CGT purposes) the amount of capital works deductions you claimed or were entitled to claim for the asset if:

    • you acquired the asset after 7.30pm (by legal time in the ACT) on 13 May 1997, or
    • you acquired the asset before that time and the expenditure that gave rise to the capital works deductions was incurred after 30 June 1999.

    Reduced cost base

    You exclude the amount of the capital works deductions you claimed or were entitled to claim for expenditure you incurred for an asset from the reduced cost base.

    Example: Capital works deduction

    Zoran acquired a rental property on 1 July 1997 for $200,000. Before disposing of the property on 30 June 2005, he had claimed $10,000 in capital works deductions.

    At the time of disposal, the cost base of the property was $210,250. Zoran must reduce the cost base of the property by $10,000 to $200,250.

    End of example
    Rollover

    There is no rollover or exemption for a capital gain you make when you sell an asset and put the proceeds into a superannuation fund or use the proceeds to purchase an identical or similar asset. For example, if you sell a rental property and put the proceeds into a superannuation fund or use the proceeds to purchase another rental property, rollover is not available. However, rollover may be available in special circumstances - in particular for destruction or compulsory acquisition of property (see chapter 7) and marriage breakdown (see chapter 8).

    Keeping records

    Keep appropriate records - see Records relating to real estate.

    Sale of a rental property

    The following example shows how you would calculate your capital gain on the sale of your rental property.

    The sample worksheet shows how you would complete the Capital gain or capital loss worksheet for this example.

    Example: sale of a rental property

    Brett purchased a residential rental property on 1 July 1997. The price he paid was $150,000 of which $6,000 was attributable to depreciating assets. He also paid $20,000 in total for pest and building inspections, stamp duty and solicitors fees.

    In the next few years, Brett incurred the following expenses on the property:

    Interest on money borrowed

    $10,000

    Rates and land tax

    $8,000

    Deductible (non-capital) repairs

    $15,000

    Total

    $33,000

    Brett cannot include the expenses of $33,000 in the cost base as he was able to claim a deduction for them.

    When Brett decided to sell the property, a real estate agent advised him that if he spent around $30,000 on major structural improvements, the property would be valued at around $500,000. The major structural improvements were completed on 1 October 2004 at a cost of $30,000.

    On 1 April 2005, he sold the property for $500,000 (of which $4,000 was attributable to depreciating assets).

    Brett's real estate agents fees and solicitors fees for the sale of the property totalled $12,500.

    Brett could not claim any capital works deductions for the original construction costs as construction of the property began before 18 July 1985. However, he could claim a capital works deduction of $375 ($30,000 × 2.5% × 183 ÷ 365) for the major structural improvements. For information about capital works that qualify for a deduction, see Rental properties 2005 (NAT 1729-6.2005). For information about how capital works deductions affect the CGT cost base, see Cost base adjustments for capital works deductions.

    This is Brett's only capital gain for the year - and he has no capital losses to offset from this year or previous years.

    Brett works out his cost base as follows:

    Purchase price of property (not including depreciating assets)

    $144,000

    plus Pest and building inspections, stamp duty and solicitors fees on purchase of the property

    $20,000

    Capital expenditure (major structural improvements) $30,000 less capital works deduction ($375)

    $29,625

    Real estate agents fees and solicitors fees on sale of the property

    $12,500

    Cost base unindexed

    $206,125

    Brett deducts his cost base from his capital proceeds (sale price):

    Proceeds from selling the house (not including depreciating assets)

    $496,000

    less Cost base unindexed

    $206,125

    Total

    $289,875

    He decides the discount method will give him the best result, so he uses this method to calculate his capital gain:

    $289,875 × 50% = $144,937

    Brett shows $144,937 at A item 17 on his tax return (supplementary section) - or item 9 if he uses the tax return for retirees.

    Brett shows $289,875 at H Total current year capital gains at item 17 on his tax return (supplementary section) - or at item 9 if he uses the tax return for retirees. Brett must also make balancing adjustment calculations for his depreciating assets. Because he used the property 100% for taxable purposes he will not make a capital gain or capital loss from the depreciating assets.

    End of example
    Other CGT events affecting real estate

    CGT event B1 happens to real estate if you enter into a terms contract. Generally speaking, a terms contract is one where the purchaser is entitled to possession of the land or the receipt of rents and profits before becoming entitled to a transfer or conveyance of the land (that is, before completing the purchase by paying the balance of the purchase price and receiving the instrument of transfer and title deeds).

    CGT event B1 happens when use and enjoyment of the land is first obtained by the purchaser. Use and enjoyment of the land from a practical point of view takes place at the time the purchaser gets possession of the land or the date the purchaser becomes entitled to the receipt of rents and profits.

    If the contract falls through before completion and title to the land does not pass to the purchaser, you may be entitled to amend your assessment for the year in which CGT event B1 happened.

    CGT event C1 happens if an asset is lost or destroyed. This event may happen if, for example, a building on your land is destroyed by fire. Your capital proceeds for CGT event C1 happening include any insurance proceeds you may receive for the loss or destruction. The market value substitution rule for capital proceeds that generally applies if you receive no capital proceeds does not apply if CGT event C1 happens. For more information, see chapter 7.

    CGT event D1 happens if you give someone a right to reside in a dwelling. The capital proceeds include money (but not rent) and the value of any property you receive.

    The market value substitution rule for capital proceeds (see Definitions) applies if:

    • the amount of capital proceeds you receive is more or less than the market value of the right, and
    • you and the person you granted the right to were not dealing with each other at arm's length in connection with the event.

    CGT event D2 happens if you grant an option to a person or an entity or renew or extend an option that you had granted.

    The amount of your capital gain or capital loss from CGT event D2 is the difference between what you receive for granting the right and any expenditure you incurred on it. The CGT discount does not apply to CGT event D2.

    Example: Granting of an option

    You were approached by Colleen who was interested in buying your land. On 30 June 2004, you granted her an option to purchase your land within 12 months for $200,000. Colleen pays you $10,000 for the grant of the option. You incur legal fees of $500. You made a capital gain in the 2003-04 income year of $9,500.

    End of example
    Exercise of an option

    If the option you granted is later exercised, you ignore any capital gain or capital loss you made from the grant, renewal or extension. You may have to amend your income tax assessment for an earlier income year.

    Similarly, any capital gain or capital loss that the grantee would otherwise make from the exercise of the option is disregarded.

    The effect of the exercise of an option depends on whether the option was a call option or a put option. A call option is one that binds the grantor to dispose of an asset. A put option binds the grantor to acquire an asset.

    Example: Granting of an option (cont)

    On 1 February 2005, Colleen exercised the option. You disregard the capital gain that you made in 2004 and you request an amendment of your income tax assessment to exclude that amount. The $10,000 you received for the grant of the option is considered to be part of the capital proceeds for the sale of your property in the 2004-05 income year. Your capital gain or capital loss from the property is the difference between its cost base/reduced cost base and $210,000.

    End of example

    CGT event D4 happens if you enter into a conservation covenant after 15 June 2000 over land that you own and if you receive capital proceeds for entering into the covenant.

    From 1 July 2002, CGT event D4 also happens if you receive no capital proceeds for entering into the covenant and you can claim a tax deduction for entering into the covenant. One of the conditions for a tax deduction is that the covenant is entered into with a deductible gift recipient or an Australian government agency (that is, the Commonwealth, a state, a territory or one of their authorities).

    A 'conservation covenant' is a covenant that:

    • restricts or prohibits certain activities on the land that could degrade the environmental value of the land
    • is permanent and binding on current and future land owners (by way of registration on the title to the land where possible), and
    • is approved by the Minister for the Environment and Heritage (including those entered into under a program approved by that Minister).

    If CGT event D4 happens, you calculate your capital gain by comparing your capital proceeds from entering into the covenant with the portion of the cost base of the land that is attributable to the covenant.

    Similarly, you calculate your capital loss by comparing your capital proceeds from entering into the covenant with the portion of the reduced cost base of the land that is attributable to the covenant.

    (Note that the market value substitution rule for capital proceeds that generally applies if you receive no consideration for a CGT event does not apply if CGT event D4 happens. Instead, the capital proceeds are equal to the amount you can claim as a tax deduction for entering into the covenant.)

    Calculate the relevant portion of the cost base and reduced cost base attributable to the covenant using this formula:

    Cost base (reduced cost base) × (capital proceeds from entering into the covenant of land ÷ those capital proceeds plus the market value of the land just after you enter into the covenant

    As the conservation covenant will affect the value of the entire land you must use the cost base of the entire land in calculating the cost base apportioned to the covenant. This is the case even if the covenant specifically states within its terms that the restrictions as to use only apply to part of the land.

    If CGT event D4 does not apply to a conservation covenant you enter into, CGT event D1 will apply.

    CGT events involving leases

    There are a number of CGT events that might apply to the lease of land.

    CGT event F1 happens if you grant a lease to a person or entity or if you extend or renew a lease that you had previously granted. In the case of a long-term lease (one that may be expected to continue for at least 50 years), you can choose to treat the grant (renewal or extension) of the lease as a part disposal of the underlying leased property.

    Example: Receiving an amount for granting a lease

    Elisabeth operates a profitable footwear retailing business, and wishes to lease some shop space in a prestigious location in the Sydney CBD. However, the demand for shop space in the locality is great, and competition between prospective tenants is fierce. In order to ensure that she secures the lease of the particular shop space that she wants, Elisabeth pays John Rich (the owner of the shop space) a premium of $6,000 in consideration for the grant of that particular lease.

    She enters into the lease on 6 September 2004, and John Rich incurs stamp duty of $300 and solicitors fees of $500 on the grant of the lease.

    John makes a capital gain of $5,200 from CGT event F1

    Capital proceeds:

    $6,000

    Incidental costs: (that is, stamp duty of $300 and solicitors fees of $500)

    $800

    Note: For Elisabeth, this transaction results in CGT event C2 when the lease expires.

    End of example

    The amount of your capital gain or capital loss from CGT event F1 is the difference between any premium you got for granting the lease and the expenditure you incurred in granting it. The CGT discount does not apply to CGT event F1. The market value substitution rule for capital proceeds that generally applies if you receive no consideration for a CGT event does not apply if CGT event F1 happens.

    You can choose for CGT event F2 to apply (rather than CGT event F1) when you grant, renew or extend a long-term lease. It can apply if you are the owner of the underlying land or if you grant a sub-lease.

    Your capital proceeds if CGT event F2 happens are the greatest of:

    • the market value of the freehold or head lease (at the time you grant, renew or extend the lease)
    • the market value if you had not granted, renewed or extended the lease, and
    • any premium from the grant, renewal or extension.

    There are special cost base rules that apply if you choose for CGT event F2 to apply.

    For any later CGT event that happens to the land or the lessor's lease of it, its cost base and reduced cost base (including the cost base and reduced cost base of any building, part of a building, structure or improvement that is treated as a separate CGT asset) excludes:

    • any expenditure incurred before CGT event F2 happens, and
    • the cost of any depreciating asset for which the lessor has deducted or can deduct an amount for its decline in value.

    The fourth element of the property's cost base and reduced cost base includes any payment by the lessor to the lessee to vary or waive a term of the lease or for the forfeiture or surrender of the lease, reduced by the amount of any input tax credit to which the lessor is entitled for the variation or waiver.

    CGT event F3 happens if you make a payment to a lessee to vary a lease. You can only make a capital loss from this CGT event. Your capital loss is equal to the expenditure you incurred to change the lease.

    CGT event F4 happens if you (as lessee) receive a payment from the lessor for agreeing to vary or waive a term of the lease.

    You cannot make a capital loss from this CGT event. You will only make a capital gain from CGT event F4 if the amount of the payment you received exceeds the cost base of your lease at the time when the term is varied. In other cases, you will be required to adjust the cost base of your lease.

    The market value substitution rule for capital proceeds that applies if you do not receive market value for a CGT event does not apply if CGT event F4 happens.

    Example: Payment to lessee for change in lease

    Sam is the lessor of a commercial property. His tenant, Peter, currently holds a three-year lease over the property, which has another 26 months to run. A business associate of Sam's wishes to lease the property from Sam for a 10-year period, beginning in six months' time, for twice the rent that Peter is currently paying. Sam approaches Peter with an offer of $5,000 cash for Peter to agree to vary the terms of the lease so that the lease will expire in six months' time. Peter agrees to vary the terms on 10 August 2004.

    Sam will make a capital loss of $5,000 from CGT event F3 happening:

    Capital proceeds:

    $0

    Incidental costs/expenditure incurred:

    $5,000

    For Peter this transaction results in CGT event F4 happening. The cost base of Peter's lease at the time of the variation was $500. He makes a capital gain of $4,500 ($5,000 − $500).

    End of example

    CGT event F5 happens if you as lessor receive a payment for changing a lease.

    The amount of your capital gain or capital loss from CGT event F5 is the difference between what you receive for changing the lease and any expenditure you incurred on it. The CGT discount does not apply to CGT event F5.

    Subdivision of land

    If you subdivide a block of land, each block that results is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks. Therefore, you do not make a capital gain or a capital loss at the time of the subdivision.

    However, you may make a capital gain or capital loss when you sell the subdivided blocks. The date you acquired the subdivided blocks is the date you acquired the original parcel of land and the cost base of the original land is divided between the subdivided blocks on a reasonable basis.

    When the profit is ordinary income

    You may have made a profit from the subdivision and sale of land which occurred in the ordinary course of your business or which involved a commercial transaction or business operation entered into with the purpose of making a profit. In this case, the profit is ordinary income (see Taxation Ruling TR 92/3:Income tax: whether profits on isolated transactions are income). You reduce any capital gain from the land by the amount otherwise included in your assessable income.

    Example: Land 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 two blocks in May 2004 and began building a house on the rear block, which he finished in August 2004. He sold the rear block (including the house) in October 2004 for $250,000. Mike got a valuation from a qualified valuer who valued the rear block at $150,000 and the house at $100,000. The construction cost of the house was $85,000.

    Mike acquired the rear block before 20 September 1985, so it is not subject to CGT. As the new house was constructed after 20 September 1985 on land purchased before that date, the house is taken to be a separate asset from the land. Mike is taken to have acquired the house in May 2004 when he began building it. Mike made a capital gain of $15,000 ($100,000 − $85,000) when he sold the house because he did not use it as his main residence.

    As Mike had owned the house for less than 12 months, he used the 'other' method to calculate his capital gain.

    End of example

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

    Kym bought a house on a 0.1 hectare block of land in June 2004 for $350,000. The house was valued at $120,000 and the land at $230,000. Kym lived in the house as her main residence. She incurred $12,000 in stamp duty and legal fees purchasing the property.

    In January 2005, she subdivided the land into two 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 2005, she sold the rear block for $130,000.

    As Kym sold the rear block of land separately, the main residence exemption does not apply to that land. She contacted several local real estate agents who advised her that the value of the front block was $15,000 higher than the rear block. Kym apportioned the $230,000 original cost base into $107,500 for the rear block (46.7%) and $122,500 for the front block (53.3%). Kim incurred $3,000 legal fees on the sale.

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

    Cost of the land

    $107,500

    46.7% of the $12,000 stamp duty and legal fees on the purchase

    $5,604

    46.7% of the $10,000 cost of survey, legal and application fees

    $4,670

    Cost of connecting water and drainage

    $1,000

    Legal fees on sale

    $3,000

    Total

    $121,774

    The capital gain on the sale of the rear block is $8,226. She calculates this by subtracting the cost base ($121,774) from the sale price ($130,000). As Kym had owned the land for less than 12 months, she uses the 'other' method to calculate her capital gain.

    Kym will get the full exemption for her house and the front block if she uses them as her main residence for the full period she owns them.

    End of example

    Amalgamation of title

    The amalgamation of the titles to various blocks of land that you own does not result in a CGT event happening.

    Land you acquire before 20 September 1985 that is amalgamated with land acquired on or after that date retains its pre-CGT status.

    Example: Amalgamation of title

    On 1 April 1984, Robert bought a block of land. On 1 June 1999, he bought another block adjacent to the first one. Robert amalgamated the titles to the two blocks into one title.

    Robert is taken to have two separate assets. The first block continues to be treated as a pre-CGT asset.

    End of example
    Examples of CGT calculations affecting real estate

    There are a number of other examples in this guide that explain how to calculate your capital gain or capital loss on the sale of real estate:

    • calculation of capital gain (including worksheet) where a person can choose the indexation or discount method to calculate their capital gain - see example of Val
    • calculation of capital gain on property owned for 12 months or less - see example of Marie-Anne
    • recoupment of expenditure affecting CGT cost base calculation - see example of John.
    • deductions affecting CGT cost base calculations - see example of Zoran.

    Main residence

    Generally, you can ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence (also referred to as 'your home').

    To get full exemption from CGT:

    • the dwelling must have been your home for the whole period you owned it
    • you must not have used the dwelling to produce assessable income, and
    • any land on which the dwelling is situated must be 2 hectares or less.

    If you are not fully exempt, you may be partially exempt if:

    • the dwelling was your main residence during only part of the period you owned it
    • you used the dwelling to produce assessable income, or
    • the land on which the dwelling is situated is more than 2 hectares.

    Short absences from your home - for example, annual holidays, do not affect your exemption.

    Special rules

    There are some special CGT rules that are not covered in this chapter that may affect you if your home was:

    • destroyed and you receive money or another asset as compensation or under an insurance policy (see chapter 7)
    • transferred to you as a result of its conversion to strata title, or
    • compulsorily acquired by an Australian government agency (see chapter 7).

    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 exception to this rule is if you move from one main residence to another. In this case you can treat two dwellings as your main residence for a limited time (see Moving from one main residence to another more information). Special rules apply if you have a different main residence from your spouse or dependent children (see Having a different home from your spouse or dependent child).

    What is a dwelling?

    A dwelling is anything that is used wholly or mainly for residential accommodation. Certain mobile homes can also be a dwelling. Examples of a dwelling are:

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

    Any land the dwelling is on is included as part of the dwelling but it only qualifies for the main residence exemption if the land and the dwelling are sold together. Land adjacent to the dwelling may also qualify for exemption (see Land adjacent to the dwelling for more information).

    What is an ownership interest?

    In the case of a flat or home unit, you have an ownership interest if you have:

    • a legal or equitable interest in a strata title in the flat or home unit
    • 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 constructed and that share gives you a right to occupy the flat or home unit.

    In the case of a dwelling that is not a flat or home unit, you have an ownership interest if you have:

    • a legal or equitable interest in the land on which it is constructed, or
    • a licence or right to occupy it.

    In the case of land, you have an ownership interest if you have:

    • a legal or equitable interest in it, or
    • a right to occupy it.

    An equitable interest may include life tenancy of a dwelling that you acquire - for example, under a deceased's will.

    When do you acquire an ownership interest?

    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 get 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 (or if you have a right to occupy it at an earlier time, that time) until the date of settlement of the contract of sale. This period is called your ownership period. If the home is your main residence for the whole of the ownership period and you do not use it to produce assessable income, the home is fully exempt.

    Example: Full exemption

    Frank signed a contract on 14 August 1999 to purchase land from a developer and to have a house constructed on the land. Under the contract, settlement did not occur until construction was completed on 26 October 2000.

    Frank moved into the house immediately upon settlement of the contract he had with the developer - that is, on 26 October 2000. He did not have a right to occupy the house at an earlier time under the purchase contract. He signed the contract to sell it on 25 May 2005 and settlement occurred on 20 July 2005. The house was Frank's main residence for the full period he owned it and he did not use any part of it to produce income.

    For CGT purposes, Frank is taken to have acquired the land on which the house was constructed on the date he entered into the contract - 14 August 1999. However, because the house was Frank's main residence for the whole period between settlement of the purchase contract and settlement of the sale contract, it is fully exempt.

    The period between when Frank entered into the purchase contract and started to live in the house - 14 August 1999 to 25 October 2000 - is ignored. This is because the relevant dates for the main residence exemption are the settlement dates or, if you had a right under the purchase contract to occupy the dwelling at an earlier time, that time until settlement of the sale contract.

    End of example

    Even though the settlement dates are used to calculate the period for which the main residence exemption applies, the dates you enter into the purchase and sale contracts are important.

    A CGT event occurs when you enter into the sale contract. You include any capital gain on your tax return for the year of income in which the CGT event occurs. The dates you enter into the purchase and sale contracts are also relevant for determining what method you can use to work out your capital gain from your main residence.

    Example: Part exemption

    The facts are the same as in the previous example except that Frank rented out the house from 26 October 2000 - the date of settlement of the purchase contract - until 2 March 2002.

    Frank makes a capital gain of $90,000 on the house. To work out the part of the capital gain that is not exempt, Frank must determine how many days in his ownership period the dwelling was not his main residence.

    Frank had an ownership interest in the property from settlement of the purchase contract (26 October 2000) until settlement of the sale contract (20 July 2005) - a total of 1,729 days.

    The period between the dates the purchase contract was signed (14 August 1999) and settled (25 October 2000) is ignored. Because the house was not Frank's main residence from 26 October 2000 to 2 March 2002 (493 days), he does not get the exemption for this period.

    Frank calculates his capital gain as follows:

    Capital gain × ownership period = taxable portion

    $90,000 × (493 days ÷ 1,729 days) = $25,662

    Because Frank entered into the purchase contract before 11.45am (by legal time in the ACT) on 21 September 1999 and entered into the sale contract after this time (and he owned the house for at least 12 months), he can choose either the indexation or the discount method to calculate his capital gain. Frank decides to reduce his capital gain by the CGT discount of 50% after applying any capital losses.

    Because Frank signed the sale contract on 25 May 2005, the CGT event occurred in the 2004-05 income year, even though settlement occurred in the next income year. Frank shows the capital gain on his 2005 tax return.

    End of example

    Is the dwelling your main residence?

    The following factors may be relevant in working out whether a dwelling is your main residence:

    • the length of time you live there - there is no minimum time a person has to live in a home before it is considered to be their main residence
    • whether your family lives there
    • 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, phone, gas or electricity)
    • your intention in occupying the dwelling.

    A mere intention to construct or occupy a dwelling as your main residence - without actually doing so - is not sufficient to get the exemption.

    In certain circumstances, you may choose to treat a dwelling as your main residence even though:

    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 that time. This would generally be the date of settlement of the purchase contract. This means that, if there is a delay in moving in because of illness or other reasonable cause, the exemption is still available from when you acquired your ownership interest in the dwelling.

    If you could not move in because the dwelling was being rented to someone, you are not considered to have moved in as soon as practicable after you acquired your ownership interest.

    As mentioned earlier, there is a special rule that allows you to treat more than one dwelling as your main residence for a limited time if you are changing main residences (see Moving from one main residence to another).

    Land adjacent to the dwelling

    The land adjacent to a dwelling is also exempt 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, you can choose which 2 hectares are exempt.

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

    If you sell any of the land adjacent to your dwelling separately from the dwelling, the land is not exempt. It is only exempt when sold with the dwelling. There is an exception if the dwelling is accidentally destroyed and you sell the vacant land (see Destruction of dwelling and sale of land).

    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 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

    Tim bought a home with 15 hectares of land in November 2000. He uses 10 hectares of the land to produce income and 5 hectares for private purposes. Tim can get the main residence exemption for the home and 2 hectares of land he selects out of the 5 hectares that are used for private purposes.

    Tim gets a valuation which states that the home and 2 hectares of land that he has selected are worth two-thirds of the total value of the property. The relative values of the different parts of the property remained the same between the time of purchase and the time of sale.

    Tim entered into a contract to sell the property on 8 May 2005. The capital gain from the property is $150,000. Tim may claim the main residence exemption on the two-thirds of the capital gain attributable to the house and 2 hectares of land - that is, $100,000.

    Because he entered into the contract to acquire the property after 11.45am (by legal time in the ACT) on 21 September 1999 and owned it for at least 12 months, Tim reduces his remaining $50,000 gain (attributable to the land) by the CGT discount of 50% after applying any capital losses.

    End of example

    Other structures associated with the dwelling

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

    However, if you dispose of one of these structures separately from the flat or home unit, they are not exempt.

    Part exemption

    Main residence for only part of the period you owned it

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

    You calculate the part of the capital gain that is taxable as follows:

    Total capital gain made from the CGT event × (number of days in your ownership period when the dwelling was not your main residence ÷ total number of days in your ownership period)

    Example: Main residence for part of the ownership period

    Andrew bought a house under a contract that was settled on 1 July 1990 and moved in immediately. On 1 July 1993, he moved out and began to rent out the house. He did not choose to treat the house as his main residence for the period after he moved out, although he could have done this under the 'continuing main residence status after dwelling ceases to be your main residence' rule. The 'home first used to produce income' rule does not apply because Andrew used the home to produce income before 21 August 1996.

    The contract for the sale of the house was settled on 1 July 2004 and Andrew made a capital gain of $100,000. As he is entitled to a part exemption, Andrew's capital gain is as follows:

    $100,000 × (4,019 days ÷ 5,115 days) = $78,573

    As Andrew entered into the contract to acquire the house before 11.45am (by legal time in the ACT) on 21 September 1999 but the CGT event occurred after this date, Andrew can choose to use the discount method or the indexation method to calculate his capital gain.

    End of example

    If a dwelling was not your main residence for the whole time you owned it, some special rules may entitle you to a full exemption or extend the part exemption you would otherwise get. These rules apply to land or a dwelling if:

    Dwelling used to produce income

    Usually you cannot get the full main residence exemption if you:

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

    The interest deductibility test applies regardless of whether you actually borrowed money to acquire your dwelling. You must apply it on the assumption that you did borrow money to acquire the dwelling.

    If you rent out part of your home, you would be entitled to deduct part of the interest if you had borrowed money to acquire the dwelling.

    If you run a business or professional practice in part of your home, you would be entitled to deduct part of the interest on money you borrowed to acquire the dwelling if:

    • part of the dwelling is set aside exclusively as a place of business and is clearly identifiable as such, and
    • that part of the home is not readily adaptable for private use - for example, a doctor's surgery located within the doctor's home.

    You would not be entitled to deduct any interest expenses if, for convenience, you use a home study to undertake work usually done at your place of work. Similarly, you would not be entitled to deduct interest expenses if you do paid child-minding at home (unless a special part of the home was set aside exclusively for that purpose). In these situations, you would still get a full main residence exemption.

    Example: Renting out part of a home

    Thomas purchased a home under a contract that was settled on 1 July 1997 and sold it under a contract that was settled on 30 June 2005. The home was his main residence for the entire eight years.

    Throughout the period Thomas owned the home, a tenant rented one bedroom, which represented 20% of the home. Both Thomas and the tenant used the living room, bathroom, laundry and kitchen which represented 30% of the home. Only Thomas used the remainder of the home. Therefore Thomas would be entitled to a 35% deduction for interest if he had incurred it on money borrowed to acquire his home. The 'home first used to produce income' rule (explained below) does not apply because Thomas used the home to produce income from the date he purchased it.

    Thomas made a capital gain of $120,000 when he sold the home. Of this total gain, the following proportion is not exempt:

    Capital gain × percentage of floor area = taxable portion

    $120,000 × 35% = $42,000

    As Thomas entered into the contract to acquire the home before 11.45am (by legal time in the ACT) on 21 September 1999 and entered into the contract to sell it after that time, and held it for at least 12 months, he can use either the indexation or the discount method to calculate his capital gain.

    End of example

    If you set aside and use part of the dwelling exclusively as a place of business, you cannot get a CGT exemption for that part of the dwelling by not claiming a deduction for the interest. Nor can you include interest in the cost base if you are entitled to a deduction but do not claim it.

    You can still get a full main residence exemption if someone else uses part of your home to produce income and you receive no income from that person.

    When a CGT event happens to the home, the proportion of the capital gain or capital loss that is taxable is an amount that is reasonable according to the extent to which you would have been able to deduct the interest on money borrowed to acquire the home.

    In most cases this is the proportion of the floor area of the home that is set aside to produce income and the period you use the home to produce income. This includes if the dwelling is available (for example, advertised) for rent.

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

    Ruth bought her home under a contract that was settled on 1 January 1999. She sold it under a contract that was entered into on 1 November 2004 and was settled on 31 December 2004. It was her main residence for the entire six years.

    From the time she bought it until 31 December 2001, Ruth used part of the home to operate her photographic business. She modified the rooms for that purpose and they were no longer suitable for private and domestic use. They represented 25% of the total floor area of the home.

    When she sold the home, Ruth made a capital gain of $80,000. The following proportion of the gain is taxable:

    Capital gain × percentage of floor area not used as main residence × percentage of period of ownership that that part of the home was not used as main residence = taxable portion

    $80,000 × 25% × 50% = $10,000

    As Ruth entered into the contract to acquire the home before 11.45am (by legal time in the ACT) on 21 September 1999 and entered into the contract to sell it after that time, and held it for at least 12 months, she can use either the indexation or discount method to calculate her capital gain.

    The 'home first used to produce income' rule does not apply because Ruth used the home to produce income from the date she purchased it.

    End of example

    For more information on rental properties (for example, negative gearing and deductions), see Rental properties 2004–05.

    Home first used to produce income

    If you start using part or all of your main residence to produce income for the first time after 20 August 1996, a special rule affects the way you calculate your capital gain or capital loss.

    In this case, you are taken to have acquired the dwelling at its market value at the time you first used it to produce income if all of the following apply:

    • you acquired the dwelling on or after 20 September 1985
    • you first used the dwelling to produce income after 20  August 1996
    • when a CGT event happens to the dwelling, you would get only a part exemption because you used the dwelling to produce assessable income during the period you owned it, and
    • 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 all of the above apply, you must work out your capital gain or capital loss using the market value of the dwelling at the time you first used it to produce income. You do not have a choice.

    If a deceased's main residence passed to you as a beneficiary or as trustee of their estate on or after 20 September 1985, you are taken to have acquired the dwelling at its market value at the time you first used it to produce your income only if:

    • you first used the dwelling to produce income after 20 August 1996
    • when a CGT event happens to the dwelling, you would get only a part exemption because you used the dwelling 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, and
    • the CGT event did not happen to the dwelling within two years of the person's date of death.
    Full exemption

    You may have made the choice to treat a dwelling as your main residence after the dwelling ceases to be your main residence (see Continuing main residence status after dwelling ceases to be your main residence). In this case, if the dwelling is fully exempt, the 'home first used to produce income' rule does not apply.

    In working out the amount of capital gain or capital loss, the period before the dwelling is first used by you to produce income is not taken into account. The extent of the exemption depends on the period after that time and the proportion of the home used to produce income. The example below explains this.

    If the 'home first used to produce income' rule applies and the period between when you first used the dwelling to produce income and the CGT event happening is less than 12 months, the CGT discount method is not available.

    Example: Home becomes a rental property after 20 August 1996

    Erin purchased a home in July 2000 for $280,000. The home was her main residence until she moved into a new home on 1 August 2003. On 2 August 2003 she commenced to rent out the old home. At that time the market value of the old home was $450,000.

    Erin does not want to treat the old home as her main residence (see Continuing main residence status after dwelling ceases to be your main residence) as she wants the new home to be treated as her main residence from when she moved into it.

    On 14 April 2005 Erin sold the old home. Erin is taken to have acquired the old home for $450,000 on 2 August 2003 and calculates her capital gain to be $46,000.

    Because Erin is taken to have acquired the new home on 2 August 2003 and has held it for more than 12 months, she can use the discount method to calculate her capital gain. As Erin has no capital losses she includes a capital gain of $23,000 on her 2005 tax return.

    End of example

    Example: Part of home first used to produce income after 20  August 1996

    Louise purchased a home in December 1991 for $200,000. The home was her main residence. On 1 November 2003, she started to use 50% of the home for a consultancy business. At that time the market value of the house was $320,000.

    She decided to sell the property in August 2004 for $350,000. As Louise was still living in the home, she could not get a full exemption under the 'continuing main residence status after dwelling ceases to be your main residence' rule. The capital gain is 50% of the proceeds less the cost base.

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

    50% × ($350,000 − $320,000) = $15,000

    Louise is taken to have acquired the property on 1 November 2003 at a cost of $320,000. Because she is taken to have acquired it at this time, Louise is taken to have owned it for less than 12 months and must use the 'other' method to calculate her capital gain.

    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 six months if:

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

    If you dispose of the old dwelling within six months of acquiring the new one, both dwellings are exempt for the whole period between when you acquire the new one and dispose of the old one.

    If you disposed of your old home before 1 July 1998, both homes are exempt for a maximum of three months.

    Example: Exemption for both homes

    Jill and Norman bought their new home under a contract that was settled on 1 January 2005 and moved in immediately. They sold their old home under a contract that was settled on 15 April 2005. Both the old and new homes are treated as their main residence for the period 1 January to 15 April even though they did not live in the old home during that period.

    End of example

    If it takes longer than six months to dispose of your old home, both homes are exempt only for the last six months before you dispose of the old one. You get only a part exemption when a CGT event happens to your old home.

    Example: Part exemption for a first home

    Jeneen and John bought their first home under a contract that was settled on 1 January 1997 and moved in immediately. It was their main residence until they bought their second home under a contract that was entered into on 2 November 2003 and settled on 1 January 2004.

    They retained the first home after moving into the new one but did not use it to produce income. They sold the first home under a contract that was settled on 1 October 2004. They owned this home for a total period of 2,831 days.

    Both homes are treated as their main residence for the period 1 April 2004 to 1 October 2004, the last six months that Jeneen and John owned their first home. Therefore, their first home is treated as their main residence only for the period before they moved into their new home and during the last six months before its sale.

    The 91 days from 1 January 2004 to 31 March 2004, when it was not their main residence, are taken into account in calculating the proportion of their capital gain that is taxable (91 ÷ 2,831).

    Because they entered into the contract to acquire their old home before 11.45am (by legal time in the ACT) on 21 September 1999 and entered into the contract to sell it after that time, and held it for at least 12 months, Jeneen and John can use either the indexation or the discount method to calculate their capital gain.

    End of example

    Continuing main residence status after dwelling ceases to be your main residence

    In some cases you can choose to treat a dwelling as your main residence even though you no longer live in it. You cannot make this choice for a period before a dwelling first becomes your main residence - see Is the dwelling your main residence?

    Example: Not main residence until you move in

    Therese bought a house and rented it out immediately. Later 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.

    End of example

    This choice needs to be made only for the income year that the CGT event happens to the dwelling - for example, 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 stop living in it.

    If you do use it to produce income, you can choose to treat it as your main residence for up to six years after you stop living in it. If you make this choice and as a result of it the dwelling is fully exempt, the 'home first used to produce income' rule does not apply.

    You can choose when you want to stop the period covered by this choice.

    Example: Choosing to stop the period covered by the choice early

    James bought his home in Brisbane on 1 July 2002 and moved in immediately. On 31 July 2003 he moved to Perth and rented out his Brisbane home. James bought a new residence in Perth on 31 January 2004. He sold the property in Brisbane on 31 July 2004. In completing his 2005 tax return, James decided to continue to treat the Brisbane property as his main residence after he moved out of it but only until 31 January 2004 - when he purchased his new main residence in Perth.

    End of example

    If you are absent more than once during the period you own the home, the six-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 six years

    Lisa buys a house after 20 September 1985 but stops using it as her main residence for the 10 years immediately before she sells it. During this period, she rents it out for six years and leaves it vacant for four years.

    Lisa chooses to treat the dwelling as her main residence for the period after she stopped living in it, so she disregards any capital gain or capital loss she makes on the sale of the dwelling. The maximum period the dwelling can continue to be her main residence while she uses it to produce income is six 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, as the dwelling is fully exempt because Lisa made this choice, the 'home first used to produce income' rule does not apply.

    Home used to produce income for more than one period totalling six years

    In the 10-year period after Lisa stopped living in the dwelling she rents it out for three years, leaves it vacant for two years, rents it out for the next three years, then once more leaves it vacant for two years.

    If she chooses to treat the dwelling as her main residence for the period after she stopped living in it, she again disregards any capital gain or capital loss she makes on selling it. This is because the period she used the home to produce income during each absence is not more than six years. (See the example below).

    End of example

    Example: Home ceases to be the main residence and is used to produce income for more than six 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 five years from 1992 to 1996 is the first period the Sydney home was used to produce income for the purpose of the six-year test.

    1 January 1997

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

    1 March 1997

    Ian again rented out his Sydney home - this time for two years.

    28 February 1999

    The tenant of his Sydney home left.

    The period of two years from 1997 to 1999 is the second period the Sydney home was used to produce income under the six-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 2005

    Ian sold his Sydney home.

    Ian chooses to treat the Sydney home as his main residence for the period after he stopped 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 get the main residence exemption for the whole period of ownership of the Sydney home because the combined periods he used it to produce income (1 January 1992 to 31 December 1996 and 1 March 1997 to 28 February 1999) during his one absence were more than six years.

    As a result, the Sydney house is not exempt for the period it was used to produce income that exceeds the six-year period - that is, one year.

    If the capital gain on the disposal of the Sydney home is $250,000, he calculates the amount of the gain that is taxable as follows:

    Period of ownership of the Sydney home

    1 July 1990 to 28 February 2005

    5,357 days

    Periods the Sydney home was used to produce income after Ian stopped living in it

    1 January 1992 to 31 December 1996

    1,827 days

    1 March 1997 to 28 February 1999

    730 days

    Total

    2,557 days

    First six years the Sydney home was used to produce income

    1 January 1992 to 31 December 1996

    1,827 days

    1 March 1997 to 28 February 1998

    365 days

    Subtotal

    2,192 days

    Income producing for more than six years after Ian stopped living in it

    365 days

    Proportion of capital gain taxable in 2004-05

    $250,000 × (365 ÷ 5,357) = $17,033

    Because Ian entered into the contract to acquire the house before 11.45am (by legal time in the ACT) 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.

    21 August 1996 Important

    The 'home first used to produce income' rule explained above does not apply because the home was first used by Ian to produce income before 21 August 1996.

    End of example

    Home used to produce income and then you stop living in it

    If you use any part of your home to produce income before you stop living in it, you cannot apply the 'continuing main residence status after dwelling ceases to be your main residence' rule to that part. This means you cannot get the main residence exemption for that part of the dwelling either before or after you stop living in it.

    Example: Ceasing to live in a home after part of it is used to produce income

    Helen purchased a home under a contract that was settled on 1 July 1992 and she moved in immediately. She used 75% of the home as her main residence and the remaining 25% as a doctor's surgery, which she used until 30 June 1999.

    On 1 July 1999, she moved out and rented out the home until it was sold under a contract that was settled on 30 June 2005. Helen chose to treat the dwelling as her main residence for the six years she rented it out. She made a capital gain of $100,000 when she sold the home.

    As 25% of the home was not used as her main residence during the period before Helen stopped living in it, part of the capital gain is taxable, calculated as follows:

    $100,000 × 25% = $25,000

    Because Helen entered into the contract to acquire the house before 11.45am (by legal time in the ACT) on 21 September 1999 and sold it after that time, and owned it for at least 12 months, she can use either the indexation or the discount method to calculate her capital gain.

    The 'home first used to produce income rule' does not apply because she used it to produce income from the time she purchased it.

    End of example

    Constructing, renovating or repairing a dwelling on land you already own

    Generally, if you build a dwelling on land you already own, the land does not qualify for exemption until the dwelling becomes your main residence. However, you can choose to treat land as your main residence for up to four years before the dwelling becomes your main residence in certain circumstances.

    You can choose to have this exemption apply if you acquire an ownership interest (other than a life interest) in land and you:

    • build a dwelling on the land
    • repair or renovate an existing dwelling on the land, or
    • finish a partly constructed dwelling on the land.

    There are a number of conditions that you must satisfy before you can claim the exemption. You must first finish building, repairing or renovating the dwelling and then:

    • move into the dwelling as soon as practicable after it is finished, and
    • continue to use the dwelling as your main residence for at least three months after it becomes your main residence.

    The land, including the dwelling that is being built, renovated, repaired or finished on it, is exempt for the shorter of the following periods:

    • the four-year period immediately before the date the dwelling becomes your main residence, or
    • the period between the date you acquired the land and the date the dwelling becomes your main residence.

    However, if after you acquired the land you or someone else occupied a dwelling that was already on the land, the period of exemption starts from the date that dwelling was vacated.

    If a newly constructed dwelling is built to replace a previous dwelling that was demolished or destroyed, you can get a full exemption when you dispose of the property if:

    • the original dwelling was your main residence for the full period you owned it, you did not use it to produce assessable income and it was on land covering an area of 2 hectares or less
    • the new dwelling becomes your main residence as soon as practicable after it is completed, it continues to be your main residence until you dispose of it and that period is at least three months
    • you make a choice to treat the vacant land and new dwelling as your main residence in the period starting when you stopped occupying the previous dwelling and ending when the new dwelling becomes your main residence, and this period is four years or less, and
    • you dispose of the land and new dwelling together.

    If you make this choice, you cannot treat any other dwelling as your main residence for the period, except for a limited time under the 'moving from one main residence to another' rule.

    Therefore, if you have a dwelling 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 (including the dwelling that is being built, renovated, repaired or finished on it) for the shorter of
      • the time from when you acquire the land until the new home becomes your main residence, or
      • the four-year period immediately before the date on which the new home becomes your main residence.
       

    If you acquired your old main residence before 20 September 1985, it is exempt. This means you will benefit from choosing to treat the land on which your new dwelling is to be built, renovated, repaired or finished as your main residence for the relevant dates above.

    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 the land from the date of construction

    Grant bought vacant land on which he intended to build a new home under a contract that was settled on 3 September 2002. He bought his previous home under a contract that was settled on 3 November 1991.

    Grant finished building his new home on 8 September 2004. He moved into it on 7 October 2004, which was as soon as practicable after completion. He sold his previous home under a contract that was settled on 1 October 2004.

    If Grant wants to, he can:

    • treat the new home as his main residence from 3 September 2002, and
    • claim the exemption for his previous home from 3 November 1991 to 2 September 2002.

    Both homes are also exempt from 1 April 2004 to 1 October 2004, the date Grant disposed of the old home. This is because the maximum six-month exemption outlined in the section Moving from one main residence to another also applies.

    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 three months of residence in the new home, this exemption can still apply.

    If you owned 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 the dwelling as your main residence for the shorter of:

    • four years before your death, or
    • the period starting when you acquired 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 apply the main residence exemption as if the home had not been destroyed and continued to be your main residence.

    You can get a full exemption for the land if you used it solely for private purposes in association with your home and does not exceed 2 hectares. You cannot claim the main residence exemption for this period for any other dwelling, except for a limited time if you are changing main residences (see Moving from one main residence to another).

    Having a different home from your spouse or dependent child

    If you and a dependent child under 18 years old have different homes for a period, you must choose one of the homes as the main residence for both of you for the period.

    If you and your spouse have different homes for a period, you and your spouse must either:

    • choose one of the homes as the main residence for both of you for the period, or
    • nominate the different homes as your main residences for the period.

    If you nominate different homes for the period and you own 50% or less of the home you have nominated, you qualify for an exemption for your share. If you own more than 50%, your share is exempt for half the period you and your spouse had different homes.

    The same applies to your spouse. If your spouse owns 50% or less of the home they have nominated, they qualify for an exemption for their share. However, if your spouse owns more than 50% of the home, their share is exempt for only half the period you had different homes.

    This rule applies to each home the spouses own whether they have sole ownership or own the home jointly (either as joint tenants or tenants in common).

    This rule applies also if you choose to treat a dwelling as your main residence when you no longer live in it (see Continuing main residence status after dwelling ceases to be your main residence), and this choice results in your having a different main residence from your spouse or a dependent child for a period.

    Example: Spouses with different main residences

    Under a contract that was settled on 1 July 1996, Kathy and her spouse Grahame purchased a townhouse where they lived together. Grahame owns 70% of the townhouse while Kathy owns the other 30%.

    Under a contract that was settled on 1 August 1998, they purchased a beach house which they own in equal shares. From 1 May 1999, Kathy lives in their beach house while Grahame keeps living in the townhouse. Grahame nominated the townhouse as his main residence and Kathy nominated the beach house as her main residence.

    Kathy and Grahame sold the beach house under a contract that was settled on 15 April 2005. As it is Kathy's home and she owns 50% of it, she disregards her share of any capital gain or capital loss for the period she and Grahame had different homes (1 May 1999-15 April 2005).

    As Grahame did not live in the beach house or nominate it as his main residence when he and Kathy had different homes, he does not ignore his share of any capital gain or capital loss for any of the period he owned it.

    Grahame and Kathy also sold the townhouse under a contract that was settled on 15 April 2005.

    Because Grahame owns more than 50% of the townhouse, it is taken to have been his main residence for half of the period when he and Kathy had different homes.

    If the total capital gain on the sale of the townhouse is $100,000, Grahame's share of the capital gain is $70,000 (reflecting his 70% ownership interest). The portion of the gain that Grahame disregards under the main residence exemption is:

    $70,000 × (1,034 days [see note 1] ÷ 3,211 days [see note 2]) = $22,541

    plus

    $70,000 × 50% × (2,177 days [see note 3] ÷ 3,211 days [see note 2]) = $23,729

    Note 1: townhouse was Grahame's home and he and Kathy did not have different homes

    Note 2: total ownership period

    Note 3: when Grahame and Kathy had the different homes

    The total amount disregarded by Grahame is:

    $22,541 + $23,729 = $46,270

    As Grahame bought the townhouse before 11.45am (by legal time in the ACT) on 21 September 1999 and entered into the contract to sell it after that time, and owned his share for at least 12 months, he can use either the indexation or the discount method to calculate his capital gain.

    Kathy's share of the $100,000 capital gain on the townhouse is $30,000, reflecting her 30% ownership interest. The portion she disregards is:

    $30,000 × (1,034 days [see note 4] ÷ 3,211 days [see note 5]) = $9,660

    Note 4: period before 1 May 1999 when the townhouse was Kathy's home

    Note 5: total ownership period

    As Kathy entered into the contract to buy the townhouse before 11.45am (by legal time in the ACT) on 21 September 1999 and entered into the contract to sell it after that time, and owned her share for at least 12 months, she can use either the indexation or the discount method to calculate her capital gain.

    End of example

    Example: Different main residences

    Anna and her spouse Mark jointly purchased a townhouse under a contract that was settled on 5 February 1999 and both lived in it from that date until 29 April 2005, when the contract of sale was settled. Anna owned more than 50% of the townhouse.

    Before 5 February 1999, Anna had lived alone in her own flat which she rented out after moving to the townhouse. She then sold her flat and settled the sale on 11 March 2000. Anna chose to treat the flat as her main residence from 5 February 1999 until she sold it under the 'continuing main residence status after dwelling ceases to be your main residence' rule.

    Because of Anna's choice, Mark had a different main residence from Anna for the period 5 February 1999 to 11 March 2000. Therefore, Mark must either:

    • treat Anna's flat as his main residence for that period, or
    • nominate the townhouse as his main residence for that period.

    If he chooses to treat Anna's flat as his main residence, a part of any gain Mark makes when he sells the townhouse will be taxable. He will not get an exemption for the townhouse for the period that he nominated Anna's flat as his main residence (that is, 5 February 1999 - 11 March 2000).

    If Mark nominates the townhouse as his main residence, he qualifies for a full exemption on any capital gain he makes when it is sold because he owned 50% or less of it. However, because Mark and Anna have different main residences as a result of Mark's choice, and Anna owns more than 50% of the flat, her gain on the flat will only qualify for a 50% exemption for the period from 5 February 1999 to 11 March 2000.

    Any capital gain Anna makes on the townhouse is taxable except for the period from 12 March 2000 to 29 April 2005 and the part that is ignored under the 'moving from one main residence to another' rule.

    End of example

    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 you make when a CGT event happens to the dwelling could be taxable. Even though you acquired the dwelling before CGT started, major capital improvements are considered to be separate CGT assets from the original asset and may therefore be subject to CGT in their own right if you make them on or after 20 September 1985.

    If the dwelling is your main residence and you use the improvements 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 used the improvements to produce income for any period, the part of any gain that is attributable to the improvements for that period is taxable.

    A capital improvement is taken to be major if its original cost (indexed for inflation if the improvements were made under a contract entered into before 11.45am - by legal time in the ACT - on 21 September 1999) is:

    • more than 5% of the amount you receive when you dispose of the dwelling, and
    • is greater than a certain threshold. The threshold increases every year to take account of inflation. Improvement thresholds for 1985-86 to 2004-05 are shown in the Improvements thresholds table.

    When you dispose of the dwelling, you calculate the capital gain or capital loss on the major improvements by taking away the cost base of the improvements from the proceeds of the sale that are reasonably attributable to the improvements:

    Capital gain on major improvements = proceeds of sale attributable to improvements − cost base of improvements

    You can choose to calculate the capital gain made on the improvements using either the indexation or the discount method if:

    • the improvements were made under a contract entered into before 11.45am (by legal time in the ACT) on 21 September 1999
    • the dwelling was sold after that time, and
    • you owned the improvements for at least 12 months.

    If you entered into the contract to make the improvements after 11.45am (by legal time in the ACT) on 21 September 1999 and you owned them for more than 12 months, you can calculate your capital gain using the CGT discount of 50%.

    In calculating the amount of capital proceeds to be attributed to the improvements, you must take whatever steps are appropriate to work out their value. If you make an estimate of this amount, it must be reasonable and you must be able to show how you arrived at the estimated amount.

    Example: Improvement on land acquired before 20 September 1985

    Martin bought a home in 1984. On 1 December 1993, he undertook major capital improvements worth $100,000. He sold the home for $500,000 under a contract that was settled on 1 December 2004. At the date of sale, the indexed cost base of the improvements was $112,200.

    Of the $500,000 he received for the home, $120,000 could be attributed to the improvements. Martin used the improvements to produce income from the time they were finished until the time he sold them with the home.

    The 'home first used to produce income' rule does not apply to the improvements because they were first used to produce income before 21 August 1996.

    Test 1 Is the cost base of the improvements more than 5% of $500,000 - that is, $25,000? Yes

    Test 2 Is the cost base of the improvements more than the 2004-05 threshold of $106,882? Yes

    (Because the improvements were made under a contract entered into before 11.45am - by legal time in the ACT - on 21 September 1999 the indexed cost base is used for the purpose of these tests.)

    As the answer to both questions is YES and the improvements were used to produce income, the capital gain on the improvements is taxable.

    As Martin acquired the improvements before 11.45am (by legal time in the ACT) on 21 September 1999 and sold the home after that time, and had held the improvements for at least 12 months, he could use either the indexation method or the discount method to calculate his capital gain on the improvements.

    Martin calculates his capital gain using the indexation method as follows:

    Amount of proceeds attributable to the improvements

    $120,000

    less cost base of improvements indexed for inflation

    $112,200

    Taxable capital gain

    $7,800

    Martin's capital gain using the discount method (assuming he has no capital losses or capital gains in the 2004-05 income year and does not have any unapplied net capital losses from earlier years) is:

    Amount of proceeds attributable to the improvements

    $120,000

    less cost base of improvements (without indexation)

    $100,000

    Capital gain

    $20,000

    less 50% discount

    $10,000

    Net capital gain

    $10,000

    Martin chooses the indexation method because this gives him a lower capital gain.

    Note: If the improvements had been used as part of Martin's main residence, this gain would be exempt. However, if the home (including the improvements) had been rented out for one-third of the period, one-third of the capital gain made on the improvements would have been taxable.

    End of example
    Buildings or structures constructed on land acquired before 20 September 1985

    Buildings or structures constructed on or after 20 September 1985 on land acquired before that date are also considered to be separate CGT assets from the original land. The major capital improvement threshold and 5% of capital proceeds rules do not apply to them. Therefore, they may be subject to CGT if you use them other than as your main residence.

    Inherited main residence

    If you inherit a deceased person's dwelling, you may be exempt or partially exempt when a CGT event happens to it. The same exemptions apply if a CGT event happens to a deceased's estate of which you are the trustee.

    Full exemption
    Deceased died before 20 September 1985

    As you acquired the dwelling before 20 September 1985, any capital gain you make is exempt. However, major capital improvements you make to the dwelling on or after 20 September 1985 may be taxable (see Major capital improvements to a dwelling acquired before 20 September 1985).

    Deceased died on or after 20 September 1985

    a)  The deceased acquired the dwelling before 20 September 1985 (it does not matter whether the dwelling was the main residence of the deceased person).

    You may have an ownership interest in a dwelling that passed to you as a beneficiary in a deceased estate or you may have owned it as trustee of a deceased estate. In either case, you disregard any capital gain or capital loss you make from a CGT event that happens to the dwelling if either of the following applies:

    1. You disposed of your ownership interest within two years of the person's death - that is, if the dwelling was sold under a contract, settlement occurred within two years. This exemption applies whether or not you used the dwelling as your main residence or to produce income during the two-year period. The Tax Office has no discretion to extend the two-year period.

    OR

    1. From the deceased's death until you disposed of your ownership interest, the dwelling was not used to produce income and was the main residence of one or more of:

    The dwelling can be the main residence of one of the above people (even though they may have stopped living in it) if they choose to treat it as their main residence under the 'continuing main residence status after dwelling ceases to be your main residence' rule.

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

    You disregard any capital gain or capital loss you make when a CGT event happens to the dwelling or your ownership interest in the dwelling if:

    • Condition 2 in (a) above is met and the dwelling passed to you as beneficiary or trustee on or before 20 August 1996. For this to apply, the deceased must have used the dwelling as their main residence from the date they acquired it until their death and they must not have used it to produce income.

    OR

    • One of the conditions in (a) above is met and the dwelling passed to you as beneficiary or trustee after 20 August 1996, and just before the date the deceased died it was their main residence and was not being used to produce income.

    A dwelling can still be regarded as the deceased's main residence even though they stopped living in it if they or their trustee chose to treat the dwelling as the deceased's main residence. This may happen if, for example, the person moved to a nursing home. You may need to contact the trustee or the deceased's recognised tax adviser to find out whether this choice was made.

    If it was, the dwelling can still be regarded as the deceased's main residence:

    • for an indefinite period if the dwelling was not used to produce income after the deceased stopped living in it, or
    • if it was used to produce income, for a maximum of six years after the deceased stopped living in it.

    Example: Full exemption

    Rodrigo was the sole occupant of a home he bought in April 1990. He did not live in or own another home.

    He died in January 2004 and left the house to his son, Petro. Petro rented out the house and then disposed of it 15 months after his father died.

    Petro is entitled to a full exemption from CGT as he acquired the house after 20 August 1996 and disposed of it within two years of his father's death.

    End of example
    Part exemption

    If you do not qualify for a full exemption from CGT for the home you may be entitled to a part exemption.

    You calculate your capital gain or capital loss as follows:

    Capital gain or capital loss amount × (non-main residence days ÷ total days)

    Non-main residence days

    'Non-main residence days' is the number of days that the dwelling was not the main residence.

    a) If the deceased acquired the dwelling before 20 September 1985, non-main residence days is the number of days in the period from their death until settlement of your contract for sale of the dwelling when it was not used to produce income and was not the main residence of one of the following:

    • a person who was the spouse of the deceased (except a spouse who was permanently separated from the deceased)
    • an individual who had a right to occupy the dwelling under the deceased's will, or
    • you, as a beneficiary, if you disposed of the dwelling as a beneficiary.

    b) If the deceased acquired the dwelling on or after 20 September 1985, non-main residence days is the number of days calculated under (a) plus the number of days in the deceased's period of ownership when the dwelling was not their main residence.

    Total days

    a) If the deceased acquired their ownership interest before 20 September 1985, 'total days' is the number of days from their death until you disposed of your ownership interest.

    b) If the deceased acquired the ownership interest on or after 20 September 1985, total days is the number of days in the period from when the deceased acquired the dwelling until you disposed of your ownership interest.

    Example: Part exemption

    Vicki bought a house under a contract that was settled on 12 February 1995 and she used it solely as a rental property. When she died on 17 November 1998, the house became the main residence of her beneficiary, Lesley. Lesley sold the property under a contract that was settled on 27 November 2004.

    As Vicki had never used the property as her main residence, Lesley cannot claim a full exemption from CGT. However, as Lesley used the house as her main residence, she is entitled to a part exemption from CGT.

    Vicki owned the house for 1,375 days and Lesley then lived in the house for 2,203 days, a total of 3,578 days. Assuming Lesley made a capital gain of $100,000, the taxable portion is:

    $100,000 × (1,375 ÷ 3,578) = $38,429

    As Lesley is taken to have acquired the property before 11.45am (by legal time in the ACT) on 21 September 1999 and entered into the contract to sell it after that time, and held the property for at least 12 months, she can use either the indexation or the discount method to calculate her capital gain.

    End of example

    If you dispose of your ownership interest in a dwelling within two years of the person's death, you can ignore the main residence days and total days in the period from the person's death until you dispose of the dwelling if this lessens your tax liability.

    You also ignore any non-main residence days before the deceased's death in calculating the capital gain or capital loss if:

    • you acquired the dwelling after 20 August 1996
    • the dwelling was the deceased's main residence just before their death, and
    • the dwelling was not being used to produce income at the time of their death.
    Cost to you of acquiring the dwelling

    If you acquire a dwelling the deceased had owned, there are special rules for calculating your cost base.

    These rules apply in calculating any capital gain or capital loss when a CGT event happens to the dwelling.

    The first element of the cost base and reduced cost base of a dwelling - its acquisition cost - is its market value at the date of death if either:

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

    In any other case, your acquisition cost is the deceased's cost base and reduced cost base on the day they died. If that cost base includes indexation you must recalculate it to exclude the indexation component if you prefer to use the discount method to work out your capital gain from the property.

    If you are a beneficiary, the cost base and reduced cost base also includes amounts that the trustee of the deceased's estate would have been able to include in the cost base and reduced cost base.

    Continuing main residence status

    If the deceased was not living in the home at the date of their death, they or their trustee may have chosen to continue to treat it as their main residence. You may need to contact the trustee or the deceased's recognised tax adviser to find out whether this choice was made. If it was, the dwelling can still be regarded as the deceased's main residence:

    • for an indefinite period - if the dwelling was not used to produce income after the deceased stopped living in it, or
    • for a maximum of six years after they stopped living in it - if it was used to produce income after they stopped living in it.

    Example: Continuing main residence status

    Aldo bought a house in March 1995 and lived in it.

    He moved into a nursing home in December 1999 and left the house vacant. He chose to treat the house as his main residence after he stopped living in it under the 'continuing main residence status after dwelling ceases to be your main residence' rule.

    Aldo died in February 2005 and the house passed to his beneficiary, Con, who uses the house as a rental property.

    As the house was Aldo's main residence immediately before his death and was not being used to produce income at that time, Con can get a full exemption for the period Aldo owned it.

    If Con rented out the house and sold it more than two years after Aldo's death, the capital gain for the period from the date of Aldo's death until Con sold it is taxable.

    If Con had sold the house within two years of Aldo's death, he could have ignored the main residence days and total days between Aldo's death and him selling it - which would have given him exemption for this period.

    If Aldo had rented out the house after he stopped living in it he could choose to continue to treat it as his main residence (see Continuing main residence status after dwelling ceases to be your main residence). The house would be considered to be his main residence until his death because he rented it out for less than six years.

    If this choice had been made, Con would get an exemption for the period Aldo owned the house.

    End of example

    For more information about deceased estates, see chapter 9.

    Death during construction

    If an individual entered into a contract to construct, repair or renovate a home on land they already owned, and they die before certain conditions are met, the trustee may choose that the home and land be treated as the deceased's main residence for up to four years before the home became (or was to become) their main residence.

    The trustee can make this choice if the deceased dies:

    • before the home is finished
    • before it was practicable for the home to be their main residence, or
    • before they had lived in the home for three months.

    If the trustee makes this choice, no other dwelling can be treated as the deceased's main residence during that time.

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

    If a dwelling or a share in a dwelling was transferred to you from a company or trustee of a trust as a result of your marriage breakdown, and marriage breakdown rollover applied to the transfer, you are treated as having owned the dwelling while it was owned by the company or trustee. However, you cannot get the main residence exemption during any part of the period that the company or trustee owned it (even if you lived in the dwelling during that time).

    Therefore, if a dwelling is transferred to you by a company or trustee as a result of your marriage breakdown, you will be entitled to the exemption only for the period after it was transferred when it was your main residence. You calculate this by dividing the period after the transfer that it was your main residence by the combined period you and the company or trustee owned it.

    For more information about CGT assets and marriage breakdown, see chapter 8.

    Last modified: 09 Apr 2020QC 27596