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Minimising tax on the sale of a principal residence
A profit on sale of a home which was not used solely as a principal residence may still be exempt from CGT in the following circumstances:
- The house was bought before 20 September 1985.
- The house was initially used as a principal residence and was subsequently rented for a period of less than 6 years. Alternatively if the house is not rented out then the period of absence can be for an indefinite period.
- A block of land was purchased and within four years you build a house on it which became your principal residence.
- You inherit a house which was the deceased's principal residence at the date of their death and sold it within two years of the date of death of the deceased.
Where the house has been rented out for more than six years after 20 August 1996, the home or ownership interest is considered to have been acquired at market value at the time it is first used for income producing purposes. However, a special rule assumes there would have been no CGT liability if that house had otherwise been sold before the rental began (for example, it was not previously used for income producing purposes). This special rule can operate to reduce the capital gain that would otherwise apply.
Case Studies
Six Year Rule
David and Leanne buy a house and use it as their principal residence.
They are transferred overseas for five years. They rent out the house during their absence.
Upon their return they sell the house without living in it.
Provided that they elect that the house is to be treated as their principal residence during their absence (the election should be made prior to the date of lodgment of the tax return for the year in which the sale was made) then any capital gain will be exempt from tax.
Note: There is an entitlement to another maximum period of 6 years each time the residence becomes and ceases to be the principal residence.
Vacant block of land
David and Leanne buy a vacant block of land.
They build a house on the block of land.
Provided David and Leanne satisfy the following conditions then any capital gain from the sale of the house and land will be exempt from CGT:
- they elect for this to be their principal residence
- they complete construction within four years
- they move into the completed house as soon as practicable after the work has finished
- the house is their main residence for at least three months.
A similar principle would apply if David and Leanne move out of their house for the purpose of making significant renovations to it.
The house would be treated as their principal residence during this period of absence if:
- the renovation is completed within four years
- they move back into the house as soon as practicable after the work is completed
- the house remains their main residence for at least three months.
Changing main residence
David and Leanne are in the process of selling their home.
They buy a new home.
They sell their old home within six months of buying the new home.
Generally the CGT exemption can only apply to one house that you own.
The exception is where a person owns two houses for a six month period while selling one home and buying a new one. The exception only applies to a maximum period of six months.
Note: There are some further conditions which must be met which concern the continuous use of the old home as principal residence for 3 months and the non-use of the old home for income producing purposes when it was not the principal residence in the 12 month period leading up to the change of ownership.
Inheriting a principal residence
David's mother dies.
David inherits his mother's home.
David rents out the house for one year. He then sells the house.
As the house was sold within two years of his mother's death and the property was her principal residence at the date of her death, the house is exempt from CGT.
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