When you sell your home, you may be able to disregard capital gains tax (CGT) under the main residence exemption. While this sounds straightforward, the rules are more complex than many expect. The Australian Taxation Office (ATO) has recently reminded taxpayers and advisers to take extra care, especially where a property has been rented out, used for business, or involved in more than one ownership scenario.

Understanding how the exemption works and the common traps to avoid can make a big difference when it comes time to sell.

What is the Main Residence Exemption?

The main residence exemption is designed to ensure that your family home is generally free from CGT. To qualify for a full exemption, the property must:

• be your main residence for the entire ownership period

• not have been used to produce assessable income (such as being rented out or used as a business premises)

• not have been bought to renovate and sell at a profit (property flipping)

• be situated on land of two hectares or less.

Your property also needs to be a dwelling, meaning something used mainly for residential accommodation. This includes a house or cottage, an apartment or flat, a strata title unit, a retirement village unit, or even a caravan, houseboat, or mobile home.

To be considered your main residence, you must have genuinely lived in the property. Indicators include keeping your belongings there, receiving mail at that address, being enrolled to vote there, and having utilities connected in your name.

If you meet these conditions, you can usually ignore any capital gain or loss when you sell. But not every situation is this clear cut, and that is where the partial exemption comes in.

The ATO also provides a handy CGT property exemption tool you can use to get an idea of whether you might be eligible for a full or partial exemption.

How the Partial Main Residence Exemption Works

If your home does not qualify for a full exemption for example, because you rented it out, used part of it for business, or owned more than two hectares,you may still be able to claim a partial exemption.

In this case, the capital gain is apportioned between the exempt period (when it was your main residence) and the non-exempt period (when it was used for income or not considered your main residence).

Example:

• You lived in your home for 4 years, then rented it out for 3 years before selling.

• The exemption applies to the 4 years you lived in it, and you’ll pay CGT on the 3 years it was rented (unless the 6-year absence rule applies).

The same approach applies if you only used part of your property to generate income, such as renting a room on Airbnb or running a home office that qualifies as a place of business. In these cases, the gain is split between the portion used privately and the portion used for income.

While the calculation itself can be technical, the key point is that even if you don’t qualify for a full exemption, you may still be able to reduce your tax bill substantially with a partial exemption.

For mored details and examples, please visit ATO: Using your home for rental or business.

Common Scenarios to Be Aware Of

The ATO provides guidance on how different situations can affect your eligibility:

Moving out and renting your property

You can continue to treat your former home as your main residence for up to six years while it is rented. Beyond that, a partial exemption may apply.

Using part of your home to earn income

If you rent out a room or run a business from your property, you may only qualify for a partial exemption.

Owning more than one property

You can only claim the exemption on one property at a time. A holiday house, for example, cannot be exempt unless you genuinely live in it as your main residence.

Vacant land or demolitions

Selling vacant land, even if it once had your home on it, usually means you cannot claim the exemption.

Inherited property

If you inherit a property, it may still qualify if the deceased lived in it as their main residence and you dispose of it within two years.

Foreign residents

Since 30 June 2020, foreign residents are generally not entitled to the exemption unless specific life event tests are met. Read more about this at ATO: Main residence exemption for foreign residents.

Each of these scenarios shows that the main residence exemption is rarely a simple “yes or no” answer. And in every case, there’s one thing that matters just as much as the rules themselves, your ability to prove your claim.

For a summary fact sheet with common scenarios about CGT and eligibility for the main residence exemption, go to the ATO Publication Ordering Service to download Capital gains tax and the main residence exemption.

Why Records Matter

Good records are critical to supporting your claim. You may need to show evidence that the property was in fact your main residence. Useful documentation includes:

• utility bills in your name

• electoral roll registration

• mail addressed to the property

• details of when you lived there and when it was rented

It is also important to remember that for CGT purposes, the date of the sale is the contract date, not the settlement date.

So whether you qualify for a full exemption or only a partial one, being organised with your paperwork can make all the difference when the ATO comes knocking.

The main residence exemption is one of the most valuable tax concessions available to homeowners, but it comes with conditions that need careful attention. If you are thinking about selling your home, it is worth reviewing your circumstances early to ensure you get the exemption right.