The main residence exemption is something that often comes up when selling a home, but it’s often not fully understood.
What is it?
The main residence exemption is a part of Australian property tax law that says that generally main residences (ie, homes) are exempt from capital gains tax.
In other words, if you buy the house you live in for for $500,000 and sell it for $600,000, you will generally not need to pay capital gains tax on the $100,000 gain you have made.
But why is it only generally? I cover that below.
When does the main residence exemption apply?
Most people understand that when you sell an investment property there is – hopefully – some capital gains tax to pay because you’ve made some money on the purchase and sale of the property.
However, when people sell their homes they often just think “well I’m just selling my home and there’s no tax to pay because of the main residence exemption.” But things aren’t that simple.
The main residence exemption does not apply when you subdivide off part of your property then sell that part.
For the main residence exemption to apply, the actual dwelling you live in must be sold. The trigger point for it to apply is the dwelling being sold.
So if you sell off your backyard and still hold onto your house, the selling the backyard becomes a capital gains tax event.
The other common time where the main residence exemption does not apply is when you’ve used the property to produce income.
In these instances you might have moved out of the property and rented it out for a period of time. Or you may have run business from the property. The trigger point is if you have used it to produce income.
If you’ve used the property to produce income, it can then become subject to a capital gains tax event upon its sale.
There are some exemptions to these exemptions. The legislation is very complicated.
That’s why I strongly advise speaking to a professional if you are unsure.
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