Section 118-110 says you (meaning an individual) can ignore a capital gain or capital loss made from a Capital Gains Tax event that happens to a dwelling that is your main residence.

 

In other words, if you are an individual, you can make a profit on selling your family home and not have it included in your assessable income.

 

However, this exemption may not apply in full if:

Section 118-105 puts that in the form of a map

Section 118-115 defines a dwelling to include a unit of accommodation that is...

Section 118-30 says you have an ownership interest in land or a dwelling if:

Section 118-30 says that if you acquired it under a contract

And at what point in time did you cease to hold the ownership interest?

Section 118-135 says that if you don't move into a dwelling immediately after you acquire your ownership interest in it, it is treated as being your main residence from the time of the acquisition until the time when it was first practicable for you to move into it.

What if it is not habitable? That's situation 2.

Section 118-150 gives you a maximum period of 4 years in which you can treat it as your main residence while you build, repair or renovate a dwelling, as long as you

If someone is living in the dwelling you consider needs work to make it habitable, section 118-150 (5) allows the 4 years to start from when they leave.

Section 118-150 (6) stops you treating any other dwelling as your main residence while you apply this section

If you die while the work is in progress, section 118-155 tells your survivors how to deal with the consequences:

Section 118-140 says that if you acquire an ownership interest in a dwelling that is to become your main residence and you still have your ownership interest in your existing main residence, both dwellings are treated as your main residence for the shorter of:

Answer this question....

Yes No

Section 118-145 says you can treat your previous dwelling as you main residence, even if you no longer live there

If you use it for the purpose of producing assessable income, (by renting it to someone else, etc): the maximum period = 6 years

If you do NOT use it for the purpose of producing assessable income, (by renting it to someone else, etc): the maximum period = indefinite (as long as you like)

Section 118-145 (4) stops you treating any other dwelling as your main residence while you apply this section

Section 118-160 deals with a situation in which your main residence is accidentally destroyed and a Capital Gains Tax event happens in relation to the land on which it was built without you erecting another dwelling on the land. You can choose to treat the land as if, from the time of the destruction until your ownership interest in the land ends, the dwelling had not been destroyed and was your main residence.

Section 118-160 (3) stops you treating any other dwelling as your main residence while you apply this section

Answer this question....

You own a town house in which both you and your spouse live.

Your spouse owns a beach house in which you take holidays

On 1 July 2000 you and your spouse dispose of both dwellings.

Can you treat the town house as your main residence and have your spouse treat the beach house as her main residence, thereby disregarding both capital gains?

(Hint: look at section 118-170)

 Yes No

Did you look at section 118-170 (1)? It says

If, during a period, a dwelling is your main residence and another dwelling is the main residence of your spouse (except a spouse living permanently separately and apart from you), you and your spouse must either:

choose one of the dwellings as the main residence of both of you for the period; or

nominate the different dwellings as your main residences for the period.

So far, so good, but read subsection 2

If you nominate the different dwellings as your main residences for the period, you split the exemption in accordance with subsections (3) and (4).

Subsections (3) and (4) are a bit complicated, so let's set out the principles they are based upon.

You will not get more than one principal residence exemption per family unit

Individuals should be allowed as much free choice in making elections as is possible

Now apply those principles to this situation…

Let's say you have a 90% interest in the town house, and you wish to nominate that as your principle residence.

Let's say your spouse has a 90% interest in the beach house, and he/she wishes to nominate that as his/her principle residence.

If the two of you could do that, you would effectively be getting a 180% principal residence exemption.

That would contravene the principle of one exemption per family. So subsection 3 allows each spouse to choose which dwelling they will nominate as their own principal residence, but limits the exemption to a maximum of 50% of the residence period if the ownership interest exceeds 50%

(3) If your interest in the dwelling you chose was not, during the period, more than half of the total interests in the dwelling, the dwelling is taken to have been your main residence during the period. Otherwise, the dwelling is taken to have been your main residence for half of the period.

Subsection (4) imposes the same restriction on the spouse

(4) If your spouse's interest in the dwelling your spouse chose was not, during the period, more than half of the total interests in the dwelling, the dwelling is taken to have been your spouse's main residence during the period. Otherwise, the dwelling is taken to have been your spouse's main residence for half of the period.

So can spouses each claim a principal residence exemption for a different house?

The answer is a 'yes'.

If either has an interest of 50% or less in the house, it will qualify as his/her sole or principal residence for the full period of residence.

But if either has interest of more than 50% the house, it will qualify as his/her sole or principal residence for one half of the period of residence

 Let's say it one more time!

Section 118-170 allows you to split the main residence exemption between you, but you don't get more than 100%.

Let's work that through, using some numbers

You and your spouse own a town house as tenants in common in equal shares.

You and your spouse also own a beach house as tenants in common, with your interest being 30% and your spouse's 70%.

From 1 July 1999, you live mainly in the town house and your spouse lives mainly in the beach house.

On 1 July 2000 you and your spouse dispose of both dwellings.

For the period 1 July 1999-30 June 2000 you nominate the town house as your main residence and your spouse nominates the beach house.

The town house is taken to be your main residence during the period. You get a principal residence exemption on your 50% interest in the gain on the sale of the town house.

The beach house is taken to be your spouse's main residence during half the period. Your spouse gets a principal residence exemption of his/her 70% interest in the beach house, for 50% of the period of residence

Ways of having more than one main residence that don't work - one house per child

 Just as section 118-170 stops spouses getting more than 100% principal residence exemption section 118-175 stops you getting multiple principal residence exemptions by claiming you dependent child have different main residences. It says if, at a particular time, a dwelling is your main residence and another dwelling is the main residence of a child of yours who

is under 18 and

is dependent on you for economic support,

you must choose one of them as the main residence of both of you.

Ways to lose all or part of the exemption:

Sell the house and land separately

Do you remember the definition of a dwelling? It is found in section 118-115 (2) and says

A dwelling does not include any land adjacent to a building.

So the gain on the land under the house is ignored, but the gain on the land adjacent to the house is not ignored. Is that right?

Yes and No

First the YES part - section 118-115 (2) says a dwelling does not include any land adjacent to a building.

 

Now for the NO part! - Have a look at section 118-120 !

The exemption for the land under the dwelling extends to the land adjacent to the dwelling if

You used the land primarily for private or domestic purposes in association with the dwelling.

The maximum area of land covered by the exemption (including the area of the land on which the dwelling is built) is 2 hectares.

The exemption also extends, for a flat or home unit, to a garage, storeroom or other structure that is associated with the flat or home unit (if the same CGT event happens to the structure or your ownership interest in it). However, it extends only to the extent that you used the structure primarily for private or domestic purposes in association with the flat or home unit.

Section 118-165 stops you using this concession to gain a benefit from selling the house and adjacent land separately.

It says, the exemption does not apply to a Capital Gains Tax event that happens in relation to

land, or

a garage,

storeroom or

other structure,

to which the exemption can extend under section 118-120 (about adjacent land) if that event does not also happen in relation to the dwelling or your ownership interest in it.

In other words, if you sell your principal residence and the adjacent land separately, you loose the exemption you might have received for the adjacent land.

 

Ways to lose all or part of the exemption:

Use the house as your main residence during part only of the ownership period

The principal residence exemption is intended to provide exemption from capital gains tax on the taxpayer's principal residence, so it makes sense that if this is not the case, the exemption is withdrawn. Section 118-185 does this by allowing only a partial exemption if:

you are an individual; and

the dwelling was your main residence for part only of your ownership period; and

the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person.

The formula is given in section 118-185 (2)

	Non - main residence days
Capital gain or loss *	-----------------------------------
	Days in ownership period

Answer this question….

You bought a house in July 1990 and moved in immediately.

In July 1993, you moved out and began to rent it.

You sold it in July 2000, making (apart from this Subdivision) a capital gain of $10,000.

You choose to continue to treat the dwelling as your main residence under section 118-145 (about absences) for the first 6 of the 7 years during which you rented the house out.

(Hint - you owned it 10 years and you nominated it as your principal residence for 9 years. That's the 3 years you actually lived in it plus 6 of the 7 years you were renting it out)

The principal residence exemption is intended to provide exemption from capital gains tax on the taxpayer's principal residence, but if the house is used either wholly or partly for producing assessable income, then all or part exemption is withdrawn. Section 118-190 does this by allowing only a partial exemption if:

to which the exemption extends under section 118-120,

The obvious way in which a home can be used to produce income is to rent it out. In this case the interest on the funds used to acquire the dwelling would be allowable, under section 8-1, as expenses incurred in gaining or producing assessable income.

There is another circumstance in which a home might be used partially for producing income. This is the case of the home office. If you have read the topic on deductions for the costs associated with running a home office, you will be aware that the deductibility of interest payments is often the key indicator of strength of the connection between the costs of running the home office and the production of income.

Section 118-190 (3) allows you to ignore any period that you continue to treat the dwelling as your main residence even if you are absent from that dwelling (under section 118-145 ) when working out the period during which it was used for producing assessable income. But you can only ignore this period to the extent that any part of it was not used for that purpose just before it last ceased to be your main residence.

Answer this question….

You choose to continue to treat the dwelling as your main residence under section 118-145 (about absences) for the first 6 of the 7 years during which you rented the house out.

Now assume that, when you moved in, you used 1/4 of the house as a doctor's surgery.

What would the capital gain be?

The answer to that question is rather complicated, and you can read it in the topic on the effect of death on capital gains