Main residence exemption Tag

Most of Australia has been experiencing a building boom, fuelled by government policy such as the HomeBuilder scheme and a general desire to make our living spaces better as we spend more time working, educating and living at home. However, with global supply chains and transport routes disrupted due to the effects of COVID-19, there have been well publicised material shortages and builder collapses in the sector. If you’re building or substantially renovating your home, any related delays you experience may also end up costing you when you decide to sell.

For most individual Australian tax residents, there’s an automatic exemption from CGT for the capital gain (or loss) that arises when you sell your home, known as the “main residence exemption”. Generally, the home must have been your main residence for the entire ownership period; however, exemptions may apply where you’ve had to move out while building, renovating or repairing.

The related building concession allows you to treat a dwelling as your main residence from the time that the land was acquired for a maximum period of up to four years, applying from either the time you acquire the ownership interest in the land or the time you cease to occupy a dwelling already on the land. If it takes more than four years to construct or repair the residence, you may only be entitled to a partial main residence exemption. This means that if you later sell the residence, the period when you didn’t live there during construction or renovation will be subject to CGT.

If you’re unable to complete your main residence construction or renovation project within the four-year maximum timeframe either due to the builder becoming bankrupt or due to severe illness of a family member, you may be able to apply to the ATO for discretion to extend the four-year period so you don’t get penalised financially.

Laws limiting foreign residents’ ability to claim the CGT main residence exemption are now in place. This means that if you’re a foreign resident for tax purposes at the time you sign a contract to sell a property that was your main residence, you may be liable for tens of thousands of dollars in CGT. Some limited exemptions apply for “life events”, as well as property purchased before 9 May 2017 and disposed of before 30 June 2020.

According to the ATO, a person’s residency status in earlier income years will not be relevant and there will be no partial CGT main residence exemption. Therefore, not only are current foreign residents affected, but current Australian residents who are thinking of spending extended periods overseas for work or other purposes may also need to factor in this change to any plans related to selling a main residence while overseas.