In some cases, you can choose to treat a dwelling as your main residence even though you no longer live in it. You cannot make this choice for a period before a dwelling first becomes your main residence. See Is the dwelling your main residence?
Example 75: Not main residence until you move in
Therese bought a house and rented it out immediately. Later, she stopped renting it out and moved in.
Therese cannot choose to treat the house as her main residence during the period she was absent under the continuing main residence rule, because the house was not her main residence before she rented it out. She will only be entitled to a partial exemption if she sells the dwelling.
End of exampleThis choice needs to be made only for the income year that the CGT event happens to the dwelling, for example, the year that you enter into a contract to sell it. If you own both:
- the dwelling that you can choose to treat as your main residence after you no longer live in it, and
- the dwelling you actually lived in during that period
- you make the choice for the income year you enter into the contract to sell the first of those dwellings.
If you make this choice, you cannot treat any other dwelling as your main residence for that period (except for a limited time if you are changing main residences, see Moving from one main residence to another).
If you do not use it to produce income (for example, you leave it vacant or use it as a holiday home) you can treat the dwelling as your main residence for an unlimited period after you stop living in it.
If you do use it to produce income (for example, you rent it out or it is available for rent) you can choose to treat it as your main residence for up to six years after you stop living in it. If you make this choice and as a result of it the dwelling is fully exempt, the home first used to produce income rule does not apply.
Example 76: One period of absence of 10 years
Lisa bought a house after 20 September 1985, but stopped using it as her main residence for the 10 years immediately before she sold it. During this period, she rented it out for six years and left it vacant for four years.
Lisa chooses to treat the dwelling as her main residence for the period after she stopped living in it, so she disregards any capital gain or capital loss she makes on the sale of the dwelling. The maximum period the dwelling can continue to be her main residence while she used it to produce income is six years. However, while the house is vacant, the period she can treat the dwelling as her main residence is unlimited. This means the exemption applies for the whole 10 years that she was absent from the dwelling.
As the dwelling is fully exempt because Lisa made the choice to treat the dwelling as her main residence, the home first used to produce income rule does not apply.
The maximum period that Lisa can treat the dwelling as her main residence whilst it was being used to produce income is a total of six years even if the period the dwelling was income producing was broken by a period of vacancy. For example, if Lisa rented the dwelling for four years, left it vacant for three years and rented for three years, she could only treat the dwelling as her main residence for nine of the 10 years that she was not living there.
End of exampleYou can choose when you want to stop the period covered by this choice.
For information about when and how you make a choice, see Choices.
Example 77: Choosing to stop the period covered by the choice early
James bought his home in Brisbane on 1 July 2002 and moved in immediately. On 31 July 2003, he moved to Perth and rented out his Brisbane home. James bought a new residence in Perth on 31 January 2014. He sold the property in Brisbane on 31 July 2014. In completing his 2015 tax return, James decided to continue to treat the Brisbane property as his main residence after he moved out of it, but only until 31 January 2014, when he purchased his new main residence in Perth.
End of exampleIf you rent out the dwelling for more than six years, the ‘home first used to produce income’ rule may apply, which means you are taken to have acquired the dwelling at its market value at the time you first used it to produce income. See Home first used to produce income.
If you are absent more than once during the period you own the home, the six-year maximum period that you can treat it as your main residence while you use it to produce income applies separately to each period of absence.
Example 78: Two periods of absence of eight years
Lana bought a house after 20 September 1985. For the last 20 years prior to selling the house she stopped using it as her main residence for two periods of eight years. During each period, she rented it out for six years and left it vacant for two years. Between the first and second period of absence she lived in the dwelling for two years. She sold it two years after last returning to live in the house.
Lana chooses to treat the dwelling as her main residence for the periods after she stopped living in it. She disregards any capital gain or capital loss she makes on selling it as the period of income production during each absence is not more than six years. Lana is entitled to another maximum period of six years as she returned to live in the dwelling between the periods of absence. See example 79 below for more detail where the period of income production exceeds six years.
End of example
Example 79: Home ceases to be the main residence and is used to produce income for more than six years during a single period of absence
1 July 1993
Ian settled a contract to buy a home in Sydney on 0.9 hectares of land and used it as his main residence.
1 January 1995
Ian was posted to Brisbane and settled a contract to buy another home there.
1 January 1995 to 31 December 1999
Ian rented out his Sydney home during the period he was posted to Brisbane.
31 December 1999
Ian settled a contract to sell his Brisbane home and he chose not to claim the main residence exemption for this property. The tenant left his Sydney home, and Ian decided to leave it vacant.
The period of five years from 1995 to 1999 is the first period the Sydney home was used to produce income for the purpose of the six-year test.
1 January 2000
Ian was posted from Brisbane to Melbourne for three years and settled a contract to buy a home in Melbourne. He did not return to his Sydney home at this time.
1 March 2000
Ian again rented out his Sydney home, this time for two years.
28 February 2002
The tenant of his Sydney home left, and Ian again chose to leave it vacant.
The period of two years from 2000 to 2002 is the second period the Sydney home was used to produce income under the six-year test.
31 December 2002
Ian sold his home in Melbourne. Ian chose not to claim the main residence exemption on the sale of this property.
31 December 2003
Ian returned to his home in Sydney and it again became his main residence.
28 February 2013
Ian settled a contract to sell his Sydney home.
As Ian did not claim the main residence exemption for either of his Brisbane or Melbourne homes he is able to choose to treat the Sydney home as his main residence for the period after he stopped living in it. The effect of making this choice is that any capital gains Ian made on the sale of both his Brisbane home in 1999–00 and his Melbourne home in 2002–03 are not exempt.
Ian cannot get the main residence exemption for the whole period of ownership of the Sydney home because the combined periods he used it to produce income (1 January 1995 to 31 December 1999 and 1 March 2000 to 28 February 2002) during his one absence were more than six years.
As a result, the Sydney house is not exempt for the period it was used to produce income that exceeds the six-year period, that is, one year.
If the capital gain on the disposal of the Sydney home is $250,000, he calculates the amount of the gain that is taxable as follows:
Period of ownership of the Sydney home:
1 July 1993 to 28 February 2013 |
7183 days |
Periods the Sydney home was used to produce income after Ian stopped living in it:
1 January 1995 to 31 December 1999 |
1,826 days |
1 March 2000 to 28 February 2002 |
730 days |
|
2,556 days |
First six years the Sydney home was used to produce income:
1 January 1995 to 31 December 1999 |
1,826 days |
1 March 2000 to 28 February 2001 |
365 days |
|
2,191 days |
Income producing for more than six years after Ian stopped living in it: (2,556 – 2,191) |
365 days |
Proportion of capital gain taxable in 2012–13
$250,000 |
x |
365 |
= |
$12,703 |
Because Ian entered into the contract to acquire the house before 11.45am (by legal time in the ACT) on 21 September 1999 and entered into the contract to sell it after that time, and owned it for at least 12 months, he can use either the indexation or the discount method to calculate his capital gain.
End of example21 August 1996 important
The home first used to produce income rule does not apply because the home was first used by Ian to produce income before 21 August 1996.