In Australia, the main provision that allows homeowners to avoid capital gains tax (CGT) on the sale of their primary residence is known as the “main residence exemption.”
If you sell a property that has been your main residence for the entire ownership period, you generally don’t have to pay capital gains tax on the sale. However, if the property was not your main residence for the entire ownership period, the CGT exemption may be apportioned based on the time it was your main residence and the time it was not.
To be eligible for the main residence exemption, you typically need to meet the following criteria:
- Ownership: You must own the property and have a legal interest in it.
- Occupancy: The property must have been your main residence. While there is no specific time requirement, you generally need to have lived in the property as your main residence. However, if you move out of the property but don’t establish a new main residence, you may still be able to claim the exemption for a limited period under the “absence rule.”
- Size of the property: There is no restriction on the size of the property that can qualify as a main residence, as long as it meets the criteria of being a dwelling.
If the asset is sold for less than what was originally paid for it, there is no capital gains tax to pay because no gain was made. A granny flat arrangement is also exempt from capital gains tax. Such an arrangement involves giving someone the right to occupy a property for life.
Also, you may be able to avoid capital gains tax when you sell your investment property with a self-managed superannuation fund (SMSF). The most beneficial perk of the SMSF is that when it’s in its pension phase, you will not be required to pay any CGT on the sale of your investment property.
It’s important to note that tax laws can change, and there may be additional requirements or specific circumstances that could impact your eligibility for the main residence exemption. To ensure accurate and up-to-date information, I recommend consulting with a qualified tax professional or referring to the official guidelines provided by the Australian Taxation Office (ATO).
If the property being sold is your main residence, capital gains tax does not need to be paid on any profit earned. However, if the residence was used to generate income, the exemption may not apply.