Generally, if you build a dwelling on land you already own, the land does not qualify for exemption until the dwelling becomes your main residence. However, you can choose to treat land as your main residence for up to four years before the dwelling becomes your main residence in certain circumstances.
You can choose to have this exemption apply if you acquire an ownership interest (other than a life interest) in land and you:
- build a dwelling on the land
- repair or renovate an existing dwelling on the land, or
- finish a partly constructed dwelling on the land.
There are conditions that you must satisfy before you can claim the exemption. You must first finish building, repairing or renovating the dwelling and then:
- move into the dwelling as soon as practicable after it is finished, and
- continue to use the dwelling as your main residence for at least three months after it becomes your main residence. A period in which you choose to treat a dwelling as your main residence under the continuing main residence status after dwelling ceases to be your main residence rule is taken into account in working out the three month period.
The land, including the dwelling that is being built, renovated, repaired or finished on it, is exempt for the shorter of the following periods:
- the four-year period immediately before the date the dwelling becomes your main residence
- the period between the date you acquired the land and the date the dwelling becomes your main residence.
However, if after you acquired the land you or someone else occupied a dwelling that was already on the land, the period of exemption starts from the date that dwelling was vacated.
Full Exemption
If a newly constructed dwelling is built to replace a previous dwelling that was demolished or destroyed, you can get a full exemption when you dispose of the property if:
- the original dwelling was your main residence for the full period you owned it, you did not use it to produce assessable income, and it was on land covering an area of two hectares or less
- the new dwelling becomes your main residence as soon as practicable after it is completed, it continues to be your main residence until you dispose of it, and that period is at least three months
- you make a choice to treat the vacant land and new dwelling as your main residence in the period starting when you stopped occupying the previous dwelling and ending when the new dwelling becomes your main residence, and this period is four years or less, and
- you dispose of the land and new dwelling together.
If you make this choice, you cannot treat any other dwelling as your main residence for the period, except for a limited time under the moving from one main residence to another rule.
The effect of making the choice is that there will be an unbroken period of a main residence occupancy on the land from the time the original dwelling became your main residence until your new dwelling built on that land is sold.
Therefore, if you have a dwelling you acquired on or after 20 September 1985 and you live in it while you build your new home, you must decide whether to:
- maintain the exemption for your old home, or
- have the exemption apply to the land (including the dwelling that is being built, renovated, repaired or finished on it) for the shorter of:
- the time from when you acquire the land until the new home becomes your main residence, or
- the four-year period immediately before the date on which the new home becomes your main residence.
If you acquired your old main residence before 20 September 1985, it is fully exempt. (The exception is if you made major capital improvements after that date and did not use them exclusively as your main residence; see Major capital improvements to a dwelling acquired before 20 September 1985).This means you will benefit from choosing to treat the land on which your new dwelling is to be built, renovated, repaired or finished as your main residence for the relevant dates above.
You cannot choose to have a shorter period of exemption for the new home in order to exempt the old home for part of the construction period.
For information about when and how you make a choice, see Choices.
Example 81: Choosing to claim exemption for the land from the date of construction
Grant bought vacant land on which he intended to build a new home under a contract that was settled on 3 September 2007. He bought his previous home under a contract that was settled on 3 November 1994.
Grant finished building his new home on 3 September 2016. He moved into it on 7 October 2016, which was as soon as practicable after completion. He sold his previous home under a contract that was settled on 1 October 2016.
Grant can treat the new home as his main residence from 7 October 2012. In these circumstances, the main residence exemption applies for the period of four years immediately before the date the new home actually becomes his main residence. He can also claim the exemption for his previous home from 3 November 1994 to 6 October 2012.
Both homes are also exempt from 1 April 2016 to 1 October 2016, the date Grant disposed of the old home. This is because the maximum six-month exemption also applies, see Moving from one main residence to another.
End of exampleIf you were to die at any time between entering into contracts for the construction work and the end of the first three months of residence in the new home, this exemption can still apply.
If you owned the land as a joint tenant and you die, the surviving joint tenant (or if none, the trustee of your estate) can choose to treat the land and the dwelling as your main residence for the shorter of:
- four years before your death, or
- the period starting when you acquired the land and ending when you die.
If there was already a dwelling on the land when you acquired it and someone else occupied it after that time, the surviving joint tenant (or if none, the trustee of your estate) can choose to treat the land and the dwelling as your main residence for the shorter of:
- four years before your death, or
- the period starting when the dwelling stopped being occupied so that it could be repaired or renovated and ending when you die.
Partial exemption
If a newly constructed dwelling is built to replace an original dwelling that was demolished or destroyed more than four years before the new dwelling became your main residence, you may be entitled to a partial exemption. You can get a partial exemption covering the period from four years prior to the date the new dwelling became your main residence if:
- the original dwelling was your main residence for the full period you owned it, you did not use it to produce assessable income, and it was on land covering an area of two hectares or less
- the new dwelling becomes your main residence as soon as practicable after it is completed, it continues to be your main residence until you dispose of it, and that period is at least three months
- you make a choice to treat the vacant land and new dwelling as your main residence in the period of up to four years before the new dwelling becomes your main residence, and
- you dispose of the land and new dwelling together.
As more than four years has elapsed, no exemption is available from the start of the original ownership period to the time when the original dwelling was vacated even though the original dwelling was the taxpayer’s main residence throughout that time.
If you do not make the choice, an exemption will only be available from the time the new dwelling became you main residence.
A partial exemption will also be available on the sale of a newly constructed dwelling built to replace a previous residence which was not your main residence for the whole time you owned it. For example where you had rented out your property during the original ownership period, and you treated another dwelling as your main residence during that time.