Typically, you won’t incur any Capital Gains Tax (CGT) when selling your Principal Place of Residence (PPR). A property is no longer considered your primary residence once you stop living there. Nonetheless, for CGT purposes, you can continue to classify this property as your primary residence under the following conditions:
- If you’ve used it to generate income for a maximum of 6 years,
- Indefinitely, if you haven’t used it to generate income.
You may continue to consider the property your primary residence after vacating it, and it will maintain its CGT exemption only if you aren’t designating any other property as your PPR (with the exception of a maximum of 6 months if you are relocating).
Criteria for principal residence exemptions
- The 6-year exemption period only applies while the property is considered your principal residence. If you rented out your home before living in it, the principal residence exemption won’t apply for the rental period.
- If the property remains your principal residence continuously, the typical regulations for the primary residence exemption apply. This means that if you use it for income, like renting, you’ll only be eligible for a partial main residence exemption from CGT.
- Generally, if you are a foreign resident when the primary residence is sold, you won’t be allowed to claim the principal residence exemption.
Former home not used for income
If you do not use your former home for income (for instance, if you leave it unoccupied or use it as a holiday dwelling), you can treat it as your primary residence for an unlimited duration after moving out. This applies only if you aren’t simultaneously designating another property as your primary residence.
Example:
Bill purchased a unit and resided there for 3 years. He then moved out to stay with a friend, while his son occupied the unit rent-free. Bill did not classify 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 absences while owning the property, the 6-year period applies to each individual absence. A period of absence concludes when you either stop renting your home and move back in or leave it vacant.
Example:
James signed a contract to buy a house in Brisbane on 15 September 2012 and moved in as soon as the contract was settled. He relocated to Perth on 10 October 2014 and rented out his Brisbane house. He signed a contract to buy a new home in Perth on 3 October 2019 and moved in once the contract settled. The Brisbane house was sold on 1 March 2024.
When completing his 2023–24 tax return, James chose to treat the Brisbane house as his main residence for the time after he moved out in October 2014 until he purchased his new primary residence in Perth in October 2019. As this timeframe is less than six years, James can claim a partial principal residence exemption under the ‘6-year rule.’
James decided not to consider the Brisbane house as his primary residence after purchasing the Perth house, and thus he is subject to CGT for that period. 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 purchase a house in 2004 and moved in immediately after the contract settled. He stopped residing in the house in 2013 due to work commitments and rented it for five years. Jez:
- Moved back into the house in 2018 and treated it as his primary residence for 2 years.
- Moved out again in 2020 and rented the house for another 3 years.
- Entered into a contract to sell the house in 2023.
While living in the house, Jez did not use it for income.
The 6-year limit applies separately for each rental period immediately following a time Jez occupied the property. This means Jez can categorise the house as his principal residence for both rental durations and can disregard his capital gain or loss on the sale. Jez must report the CGT event on his tax return for the year of the contract sale date and claim the ‘Main Residence Exemption’ on his tax return.
What occurs if the 6-year limit is surpassed
If you utilise your former home for income for more than 6 years in a single absence, it will be subject to CGT for the time beyond the 6-year limit. To determine your CGT upon disposing of your home:
- You must calculate your cost base, which includes the market value of your home when you first began generating income, along with any allowable costs incurred since that time (this pertains to the home first used to produce income rule).
- Your capital gain or loss is assessed based on the period following the initial use of your home for income, specifically over the 6-year limit.
The former home is used for income before you move out.
If any section of your home is utilised for income before you vacate it, you cannot apply the ongoing principal residence exemption to that section. You are ineligible for the principal residence exemption for that portion of your home both before and after you stop residing there.
Example:
Helen entered into a contract to purchase a house in 2006 and immediately moved in after the settlement. Helen
- Used 75% of the house as her primary residence, while the remaining 25% served 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 decided to treat the house as her primary residence for the 6 years it was rented out. Since 25% of the house was used to generate income during the period prior to Helen moving out, that same proportion of the capital gain is taxable:
$400,000 × 25% = $100,000
When does a property cease being your primary residence?
A property generally stops being your primary residence once you stop living in it. Several factors can indicate 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 no longer the address for your mail delivery.
- It is not your registered address on the electoral roll.
- Utilities such as gas and electricity are no longer connected.
The significance attributed to each of these factors varies based on individual circumstances. The duration of your absence from the property and your intention to return may also play a role.
Example:
Duc has lived in his house with his family for five years, making it his primary residence throughout his ownership. Duc accepts a two-year overseas posting for work. During this time:
- Duc’s family will travel and reside with him overseas.
- Duc cancels his utility services and stores all his personal belongings.
- His mail has been redirected to his overseas address, and his electoral roll address has been updated.
The house ceases to be Duc’s primary residence during his absence. Depending on his other circumstances, he may opt to continue designating it as his primary residence while he is away.
