The great Australian dream has often been linked to owning the family home, which is often an individual’s most significant asset, particularly given the Capital Gains Tax (CGT) Main Residence Exemption (MRE) can allow eligible individuals to sell their family home tax-free. However, there are many tax planning opportunities and traps that home owners may not be aware of.

In this article, we have outlined 10 common tips and traps that will assist home owners to preserve and maximise tax concessions for their family home.

The family home must be on the block of land sold

It is not uncommon for land owners to subdivide the parcel of land that their family resides on (for example subdividing the backyard to build another dwelling or to sell separately). It is important to be aware that if you subdivide a block of land, the subdivided parcel that does not have the family home is a new and separate CGT asset for tax purposes. This means the MRE may not apply to the sale of the newly established block(s).

Deceased estates have 2 years to sell the family home tax-free

The family home of a deceased individual can be eligible for the MRE if sold by the trustee of an estate or family member within 2 years from the date of death. Therefore, where possible it is best to consider to sell the property within this 2-year period. There is the possibility to request for the Tax Commissioner to exercise his discretion to extend this 2-year period but this is not guaranteed and applies in limited circumstances only.

There is technically no minimum period to establish your main residence

There is a common misconception that a property must be lived in for 6 or 12 months in order for the MRE to apply. Instead you must “establish” that the property you have lived in is your main residence. Naturally however, the longer you live in the property, the easier it will be to establish that the property is your main residence.

MRE is not available to foreign tax residents

In December 2019, the tax laws were changed such that foreign tax residents are no longer able to apply the MRE. This carve out applies even if the individual holds Australian citizenship.

There is a 6-year absence concession rule

It is possible to access the MRE if you live in the property but subsequently leave the property and then rent out the property (and not nominate another property as your main residence). In these situations, you can choose to treat the first property as your main residence for up to 6 years after you stop living in it. This concession can be handy for those that have a temporary absence from their main residence, such as moving overseas temporarily for work.

Record keeping is critical

When moving main residences, it is important to update your address with relevant regulatory bodies (such as when preparing your tax returns) and service providers, as sufficient record keeping will prevent potential disputes when claiming the MRE.

Your main residence must be held in your individual name

If you want to utilise the MRE, you cannot own your main residence in a company or trust. It must be held under your own name.

MRE is available for up to 2 hectares of land

The MRE is available for up to 2 hectares of the adjacent land that your main residence is situated on. Remaining land over the 2 hectares will be subject to CGT.

Using your main residence to earn income may impact the tax-free status

When operating a business from your main residence to derive income, the MRE will not be available for the portion of your home that your business operates from. That business portion will be subject to CGT.

Demolishing your property, demolishes your exemption

Before demolishing your property, whether it be a property you inherited or currently rent out, you must undertake appropriate tax planning. Any subsequent sale of the vacant land or reconstructed dwelling on the property will not be eligible for the MRE unless you live in the property again.

Final Comments

Being one of the last remaining assets that can be sold tax free, it is imperative to consult your tax adviser for guidance before you make significant decisions involving the family home. Doing so will ensure that family wealth remains preserved and strategically managed within the family’s financial portfolio.

Credit Timm Gavenlock Senior Tax Consultant for co-authoring.