Typically, you aren’t required to pay Capital Gains Tax (CGT) when selling your Principal Place of Residence (PPR). A property ceases to be considered your primary residence when you no longer live in it. However, for CGT purposes, you may still treat this property as your primary residence under the following conditions:
- If you have rented it out for up to 6 years,
- Indefinitely, if you haven’t rented it out.
You can continue to classify the property as your primary residence after moving out, provided you are not designating another property as your PPR (with the exception of up to 6 months during a house move).
Criteria for Principal Residence Exemptions
- The 6-year exemption period applies only while the property remains your primary residence. If you rented the property before residing in it, the principal residence exemption does not apply for that rental period.
- The usual regulations regarding the main residence exemption apply if the property is continuously your primary residence. This means if you generate income from it, like rent, you will only qualify for a partial main residence exemption from CGT.
- If you are a foreign resident at the time of selling your primary residence, you cannot claim the principal residence exemption.
Former Home Not Used for Income
If you haven’t rented out your former home (for example, if it’s left vacant or designated as a holiday house), you can regard it as your primary residence for an unlimited time after you vacate it. This only holds true if you are not simultaneously treating another property as your primary residence.
Example:
Bill purchased a unit and lived there for 3 years. He subsequently moved out to stay with a friend while his son occupied the unit rent-free. Bill did not designate any other property as his primary residence. He sold the unit twelve years later and claimed the principal residence exemption from CGT.
Multiple Absences from the Primary Residence
If you have multiple periods of absence from the property, the 6-year exemption applies to each absence. The absence period concludes when you either stop renting the home and move back in or leave it vacant.
Example:
James signed a contract to purchase a house in Brisbane on 15 September 2012 and moved in once the contract settled. He relocated to Perth on 10 October 2014 and rented out his Brisbane house. James signed a contract to buy a new home in Perth on 3 October 2019 and moved in as soon as the contract was finalised. The Brisbane house was sold on 1 March 2024.
Upon completing his 2023–24 tax return, James chose to treat the Brisbane house as his main residence for the period after moving out in October 2014 until he acquired his new primary residence in Perth in October 2019. Since this period is less than six years, James can claim a partial principal residence exemption under the ‘6-year rule’.
James opted not to treat the Brisbane house as his primary residence after purchasing the Perth house, thus incurring CGT for that timeframe. Consequently, James must report a capital gain or loss for the period not covered by the principal residence exemption in his 2024 tax return (from October 2019 until March 2024).
Dwelling Used to Produce Income During Multiple Absences
Jez signed a contract to buy a house in 2004 and moved in right after the contract settled. He ceased living there in 2013 due to work commitments and rented it out for five years. Later, Jez:
- Moved back into the house in 2018 and regarded it as his primary residence for 2 years.
- Moved out again in 2020 and rented the house for 3 years.
- Entered into a contract to sell the house in 2023.
During the times Jez lived in the house, he did not generate income from it.
The 6-year limit is applicable separately for each absence following a period Jez occupied the property. Therefore, he can consider the house as his principal residence for both rental periods and exclude his capital gain or loss on the sale. Jez must report the CGT event in his tax return for the year in which the contract sale date occurred and claim the ‘Main residence exemption’ in his tax return.
What Happens If the 6-Year Limit is Exceeded
If you have rented out your former home for more than 6 years during one absence, CGT applies for the period after the 6-year limit. To calculate your CGT when disposing of your home:
- Determine your cost base, which is the market value of your home at the time you first used it for income generation, plus any allowable costs incurred since then (this adheres to the home first used to produce income rule).
- Your capital gain or loss is calculated based on the period following your initial rental, specifically over the 6-year limit.
The Former Home is Used for Income Before You Move Out
If you utilised any part of your home for income prior to vacating it, you cannot apply the continuing principal residence exemption to that portion. Thus, the principal residence exemption isn’t applicable to that part of your home before or after you move out.
Example:
Helen signed a contract to buy a house in 2006 and moved in immediately after settlement. Helen:
- Utilised 75% of the house as her primary residence and the remaining 25% as a doctor’s surgery.
- Moved out and rented the house in 2018.
- Signed a contract to sell the house in 2024, resulting in a capital gain of $400,000.
Helen chose to consider the house as her main residence for the 6 years it was rented out. However, because 25% of the house was used to generate income before Helen ceased living in it, that same percentage of the capital gain is taxable:
$400,000 × 25% = $100,000
When Does a Property Stop Being Your Primary Residence?
A property generally stops being your primary residence when you cease living in it. Various indicators can suggest that a property is no longer your primary residence:
- You and your family no longer reside in it.
- Your personal belongings are not stored there.
- It is not the address where your mail is delivered.
- It is no longer listed as your address on the electoral roll.
- Utilities, like gas and electricity, are disconnected.
The significance allocated to each of these factors relies on individual circumstances. The duration of your absence from the property and your intent to return may also be relevant.
Example:
Duc has lived in his house with his family for 5 years, making it his primary residence throughout ownership. Duc accepts a 2-year work assignment overseas. During this time:
- Duc’s family travels and lives with him abroad.
- Duc terminates his utility services and stores all personal belongings.
- His mail is redirected to his overseas address, and his address is updated on the electoral roll.
The house ceases to be Duc’s primary residence during his absence. However, depending on his circumstances, he may opt to continue treating it as his primary residence while he is away.
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