A common question from clients is in regards to capital gains on their home. Generally, your main residence, ie, your home, is exempt from capital gains tax (CGT).
In the situation where `you live in your home or main residence and then cease to occupy it, you can choose to continue to treat that property as your main residence, under the Rules of Absence.
If your home is acquired after 19 September 1985, the following Rules of Absence determine if your home is subject to capital gains tax (CGT) when you eventually sell or transfer it.Your original home can continue to be treated as your main residence
only if you do not own the dwelling you now live in.
Rules of absence
The main residence exemption can apply:
- indefinitely, if you vacate the main residence and leave it vacant or do not use it to produce assessable income (i.e. rent)
- For a maximum of 6 years if the home is used to produce assessable income while you are absent. You are allowed another maximum period of 6 years after each time the home is re-occupied as your main residence.
Note: A taxpayer does not need to re-occupy the dwelling before the sale or transfer of the property to retain the main residence exemption.
Examples: Renting and Leaving Your Original Home Vacant
Example 1: Home that is rented for 6 years and then left vacant
John owned a house for 20 years. He stopped using it as his main residence for the last 10 years while he moved back with his parents. During this period, he rents it out for six years and leaves it vacant for four years.
During the 10 year period, John can choose to treat the dwelling as his main residence for the period after he ceased living in it and disregard any capital gain or capital loss he makes on the sale of the dwelling.
The maximum period the dwelling can continue to be his main residence while it is used to produce income is six years. It does not matter whether the period during which the home is used to produce income is a single block of six years or several shorter periods, as long as the total period it was used to produce income is no more than six years.
Example 1a: Home that is rented more than one period totalling more than six years and left vacant
Using the previous example, in the last 10-year period of ownership, John stopped living in the house. He rented it out for 6 years, left it vacant for 1 year, then rented it out for the next 4 years. Because he did not live in the property between renting it out, the maximum period of main residence exemption is 6 years. If he sold the property after owning it for 21 years, the fraction of 4 years / 21 years will be applied to calculate the capital gain.
Example 2: Home that is rented out more than one period totalling more than six years and re-occupied each time
A house is occupied by Matthew as a main residence for 3 years. He is sent overseas for 6 years and rents out his home. He moves back to Australia after 6 years of absence and re-occupies the house for 1 year. He is sent overseas again and rents out the house for a further 6 years. He then sells the house.
If Matthew does not own the residence he lives in overseas, he can choose to continue to treat the house as the main residence during both absences, with each absence being not more than 6 years. On disposal of the house, no capital gains tax is payable. It is important that between each period of rental, the property is re-occupied and not merely left vacant.