Real estate and main residence

CGT and real estate

Real estate includes vacant blocks of land, business premises, rental properties, holiday houses and hobby farms. Apart from the main residence rules, capital gains and capital losses on real estate are worked out under the rules set out earlier in this guide.

Land is a CGT asset. In some cases, improvements made to land are treated as separate CGT assets, see Separate assets. A depreciating asset that is found in a building (for example, carpet or a hot-water system) is also taken to be a separate CGT asset from the building. When a CGT event happens to your property, you must work out a capital gain or capital loss for each CGT asset it comprises (or balancing adjustment in the case of depreciating assets sold with the property).

The most common CGT event that happens to real estate is its sale or disposal, CGT event A1. The time of the event is:

• when you enter into the contract for the disposal
• if there is no contract, when the change of ownership occurs
• if the asset is compulsorily acquired by an entity, the earliest of when      
  • you received compensation from the entity
  • the entity became the asset’s owner
  • the entity entered it under a power of compulsory acquisition
  • the entity took possession under that power.

If land is disposed of under a contract, it is taken to have been disposed of when the contract is entered into, not the settlement date. The fact that a contract is subject to a condition, such as finance approval, will generally not affect this date.

You are not required to include any capital gain or capital loss in your tax return for the relevant income year until settlement occurs. When settlement occurs, you must include any capital gain or capital loss in your tax return for the income year in which the contract was made. If an assessment has already been made for that income year, you may need to have that assessment amended. Where an assessment is amended to include a net capital gain and a liability for shortfall interest charge (SIC) arises, remission of that interest charge will be considered on a case-by-case basis. Generally, it would be expected that the SIC would be remitted in full where requests for amendment are lodged within a reasonable time after the date of settlement, which, in most cases, is considered to be one month. If you consider that the SIC should be remitted, you should provide reasons why when you request the amendment to your assessment.

Rules to keep in mind

There are a few rules to keep in mind when you calculate your capital gain or capital loss from real estate, in particular rules relating to:

• the costs of owning the real estate
• cost base adjustments for capital works deductions.

Costs of owning

You don't include rates, insurance, land tax, maintenance and interest on money you borrowed to buy the property or finance improvements to it in the reduced cost base. You only include them in the cost base if you:

• acquired the property under a contract entered into after 20 August 1991 (or if you didn’t acquire it under a contract, you became the owner after that date)
• couldn't claim a deduction for the costs because you did not use the property to produce assessable income, for example, it was vacant land, your main residence, or a holiday home during the period.

Cost base adjustments for capital works deductions

In working out a capital gain for property that you used to produce assessable income (such as a rental property or business premises), you may need to exclude from the cost base and reduced cost base capital works deductions you have claimed in any income year (or omitted to claim, but can still claim, because the period for amending the relevant income tax assessment has not expired).

For information on when property (for example, a building, structure or other capital improvement to land) is treated for CGT purposes as a CGT asset separate from the land, see:

• Does capital gains tax apply to you?
• Major capital improvements to a dwelling acquired before 20 September 1985.

You must exclude from the cost base of a CGT asset (including a building, structure or other capital improvement to land that is treated as a separate asset for CGT purposes) the amount of capital works deductions you claimed (or omitted to but can still claim because the period for amending the relevant income tax assessment has not expired) for the asset if you acquired the asset:

• after 7:30 pm AEST on 13 May 1997, or
• before that time and the expenditure that gave rise to the capital works deductions was incurred after 30 June 1999.

However, if you omitted to claim capital works deductions because you did not have sufficient information to determine the amount and nature of the construction expenditure, there is no need to exclude the amount of such deductions from the cost base of the CGT asset.

Reduced cost base

You exclude the amount of the capital works deductions you claimed (or omitted to claim but can still claim because the period for amending the relevant income tax assessment has not expired) from the reduced cost base. However, if you omitted to claim capital works deductions because you did not have sufficient information to determine the amount and nature of the construction expenditure, there is no need to exclude the amount of such deductions from the reduced cost base of the CGT asset.

Rollover

There is generally no rollover or exemption for a capital gain you make when you sell an asset and put the proceeds into a superannuation fund. There is also no general exemption or rollover when you use the proceeds to purchase an identical or similar asset, or you transfer an asset into a superannuation fund. For example, a rollover is not available if you:

• sell a rental property and put the proceeds into a superannuation fund, or
• use the proceeds to purchase another rental property.

A rollover may be available in special circumstances, in particular for:

• destruction
• compulsory acquisition of property
• marriage or relationship breakdown.

However, an asset or the capital proceeds from the sale of an asset may be transferred into a superannuation fund in order to satisfy certain conditions under the small business retirement exemption.

For more information, see Small business CGT concessions.

Keeping records

Keep appropriate records, see Records relating to real estate.

Sale of a rental property

Example 54 shows how you would calculate your capital gain on the sale of your rental property.

The Capital gain or capital loss worksheet – Brett (PDF 95KB)This link will download a file shows how you would complete the Capital gain or capital loss worksheet for this example.

Investing in affordable housing

An additional CGT discount of up to 10% is allowed to Australian resident individuals who invest in affordable housing.

A property qualifies as 'affordable' housing if rent is charged at below market rate, and it is made available for eligible tenants on low to moderate incomes. The property must be managed by an eligible community housing provider (CHP).

Only dwellings that are Australian residential premises can be used to provide affordable housing. Commercial residential premises don't qualify as affordable housing. Caravans, mobile homes and houseboats are not considered residential premises.

The additional affordable housing capital gain discount applies to CGT events occurring on or after 30 December 2020.

Eligibility for the affordable housing CGT discount

The following conditions must be met to qualify for up to 10% additional capital gain discount for investing in affordable housing:

• residential premises – the dwelling is Taxable Australian Real Property (TARP) and is residential premises that is not commercial residential premises and is tenanted or available to be tenanted
• property management – the tenancy of the dwelling or its occupancy is exclusively managed by an eligible CHP
• affordable housing certification – the eligible CHP has given each entity that holds an ownership interest in the dwelling certification that the dwelling was used to provide affordable housing
• NRAS – no entity that has an ownership interest in the dwelling is entitled to receive a National Rental Affordability Scheme (NRAS) incentive for the NRAS year, and
• MIT membership – if the ownership interest in the dwelling is owned by a Managed Investment Trust (MIT), the tenant does not have an interest in the MIT that passes the non-portfolio test.

To qualify for the discount, an investor must have provided affordable housing on or after 1 January 2018 for a period, or intermittent periods, totalling at least 1,095 days. The investor must have invested either directly, or through a trust including where there is an interposed entity between the investor and the trust. The trust that provides the affordable housing and any interposed entities may be a trust, a managed investment trust or partnership, but can't be a public unit trust or superannuation fund.

How to calculate the additional CGT discount

The additional affordable housing CGT discount percentage, which will be 10% or less, is calculated as follows:

(CGT discount percent ÷ 5) × (Affordable housing days ÷ Total ownership days)

Where:

• CGT discount percentage is the discount of up to 50% on capital gains.
• Affordable housing days are the number of days the dwelling was used to provide affordable housing (on or after 1 January 2018) during its ownership period (and shown on the affordable housing certificate), subtract the number of days when the individual receiving the affordable housing capital gains discount was a foreign or temporary resident.
• Total ownership days are the number of days the dwelling was held from the time it was acquired until a CGT event occurred to it, excluding any period of foreign or temporary residency after 8 May 2012.

Affordable housing certificate

If you invested directly in affordable housing, you should have received an annual affordable housing certificate from your CHP showing the number of days your investment was used to provide affordable housing. If you invested in affordable housing through a trust or managed investment trust, you may need to contact the trustee to get the number of affordable housing days in order to work out your additional affordable housing CGT discount percentage.

For more information, see CGT discount for affordable housing.

Other CGT events affecting real estate

CGT event B1: Happens to real estate if you enter into an agreement where the new owner is entitled to possession of the land or the receipt of rents and profits before becoming entitled to a transfer or conveyance of the land.

Where this happens under a contract, it is known as a ‘terms contract’ and the new owner usually completes the purchase by paying the balance of the purchase price and receiving the instrument of transfer and title deeds.

It may also happen where an agreement is made with a relative or other party to use and enjoy the property for a specified period, after which title to the property passes to them. It will not happen where, under an arrangement, title to a property may pass at an unspecified time in the future.

CGT event B1 happens when use and enjoyment of the land is first obtained by the new owner. Use and enjoyment of the land from a practical point of view takes place at the time the new owner gets possession of the land or the date the new owner becomes entitled to the receipt of rents and profits.

If the agreement falls through before completion and title to the land does not pass to the new owner, you may be entitled to amend your assessment for the year in which CGT event B1 happened.

CGT event C1: Happens if an asset is lost or destroyed. This event may happen if, for example, a building on your land is destroyed by fire. Your capital proceeds for CGT event C1 happening include any insurance proceeds you may receive for the loss or destruction. The market value substitution rule for capital proceeds that generally applies if you receive no capital proceeds does not apply if CGT event C1 happens.

For more information, see Loss, destruction or compulsory acquisition of an asset.

CGT event D1: Happens if you give someone a right to reside in a dwelling. The capital proceeds include money (but not rent) and the value of any property you receive.

The market value substitution rule for capital proceeds (see Definitions) applies if:

• the amount of capital proceeds you receive is more or less than the market value of the right, and
• you and the person you granted the right to were not dealing with each other at arm’s length in connection with the event.

CGT event D2: Happens if you grant an option to a person or an entity, or renew or extend an option that you had granted.

The amount of your capital gain or capital loss from CGT event D2 is the difference between what you receive for granting the right and any expenditure you incurred on it. The CGT discount does not apply to CGT event D2.

Exercise of an option

If the option you granted is later exercised, you ignore any capital gain or capital loss you made from the grant, renewal or extension. You may have to amend your income tax assessment for an earlier income year.

Similarly, any capital gain or capital loss that the grantee would otherwise make from the exercise of the option is disregarded.

The effect of the exercise of an option depends on whether the option was a ‘call option’ or a ‘put option’. A call option is one that binds the grantor to dispose of an asset. A put option binds the grantor to acquire an asset.

CGT event D4: Happens if you enter into a conservation covenant after 15 June 2000 over land that you own and if you receive capital proceeds for entering into the covenant.

From 1 July 2002, CGT event D4 also happens if you receive no capital proceeds for entering into the covenant and you can claim a tax deduction for entering into the covenant. One of the conditions for a tax deduction is that the covenant is entered into with a deductible gift recipient or an Australian Government agency (that is, the Commonwealth, a state, a territory or one of their authorities).

A ‘conservation covenant’ is a covenant that:

• restricts or prohibits certain activities on the land that could degrade the environmental value of the land
• is permanent and binding on current and future land owners (by way of registration on the title to the land where possible)
• is approved by the Environment Minister (including those entered into under a program approved by that Minister).

If CGT event D4 happens, you calculate your capital gain by comparing your capital proceeds from entering into the covenant with the portion of the cost base of the land that is attributable to the covenant.

Similarly, you calculate your capital loss by comparing your capital proceeds from entering into the covenant with the portion of the reduced cost base of the land that is attributable to the covenant.

The market value substitution rule for capital proceeds that generally applies if you receive no consideration for a CGT event does not apply if CGT event D4 happens. Instead, the capital proceeds are equal to the amount you can claim as a tax deduction for entering into the covenant.

Calculate the relevant portion of the cost base and reduced cost base attributable to the covenant using this formula:

A × (B ÷ C)

Where:

• A is cost base (reduced cost base)
• B is capital proceeds from entering into the covenant over land
• C is those capital proceeds plus the market value of the land just after you enter into the covenant

As the conservation covenant will affect the value of the entire land you must use the cost base of the entire land in calculating the cost base apportioned to the covenant. This is the case even if the covenant specifically states within its terms that the restrictions as to use only apply to part of the land.

CGT event D4 will not happen if you receive no capital proceeds and the conditions for a tax deduction for entering into the covenant are not satisfied. In this case, CGT event D1 will apply.

CGT events involving leases

There are a number of CGT events that may apply to the lease of land.

CGT event F1: Happens if you grant a lease to a person or entity or if you extend or renew a lease that you had previously granted. In the case of a long-term lease (one that may be expected to continue for at least 50 years), you can choose to treat the grant (renewal or extension) of the lease as a part disposal of the underlying leased property.

The amount of your capital gain or capital loss from CGT event F1 is the difference between any premium you got for granting the lease and the expenditure you incurred in granting it. The CGT discount does not apply to CGT event F1. The market value substitution rule for capital proceeds that generally applies if you receive no consideration for a CGT event does not apply if CGT event F1 happens.

CGT event F2: You can choose for CGT event F2 to apply (rather than CGT event F1) when you grant, renew or extend a long-term lease (at least 50 years). It can apply if you are the owner of the underlying land or if you grant a sub-lease.

Your capital proceeds if CGT event F2 happens are the greatest of:

• the market value of the freehold or head lease (at the time you grant, renew or extend the lease)
• the market value if you had not granted, renewed or extended the lease
• any premium from the grant, renewal or extension.

There are special cost base rules that apply if you choose for CGT event F2 to apply.

For any later CGT event that happens to the land or the lessor’s lease of it, its cost base and reduced cost base (including the cost base and reduced cost base of any building, part of a building, structure or improvement that is treated as a separate CGT asset) excludes:

• any expenditure incurred before CGT event F2 happens
• the cost of any depreciating asset for which the lessor has deducted or can deduct an amount for its decline in value.

The 4th element of the property’s cost base and reduced cost base includes any payment by the lessor to the lessee to vary or waive a term of the lease or for the forfeiture or surrender of the lease, reduced by the amount of any input tax credit to which the lessor is entitled for the variation or waiver.

CGT event F3: Happens if you make a payment to a lessee to vary a lease. You can only make a capital loss from this CGT event. Your capital loss is equal to the expenditure you incurred to change the lease.

CGT event F4: Happens if you (as lessee) receive a payment from the lessor for agreeing to vary or waive a term of the lease.

You can't make a capital loss from this CGT event. You will only make a capital gain from CGT event F4 if the amount of the payment you received exceeds the cost base of your lease at the time when the term is varied. In other cases, you will be required to adjust the cost base of your lease.

The market value substitution rule for capital proceeds that applies if you don't receive market value for a CGT event does not apply if CGT event F4 happens.

You disregard any capital loss you make from the expiry, forfeiture, surrender or assignment of a lease (except one granted for 99 years or more) if you didn't use it solely or mainly for the purpose of producing assessable income, for example, if you used it for private purposes.

CGT event F5: Happens if you, as lessor, receive a payment for changing a lease.

The amount of your capital gain or capital loss from CGT event F5 is the difference between what you receive for changing the lease and any expenditure you incurred on it. The CGT discount does not apply to CGT event F5.

Subdivision of land

If you subdivide a block of land, each block that results is registered with a separate title. For CGT purposes, the original land parcel is divided into 2 or more separate assets. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks. Therefore, you don't make a capital gain or a capital loss at the time of the subdivision.

However, you may make a capital gain or capital loss when you sell the subdivided blocks. The date you acquired the subdivided blocks is the date you acquired the original parcel of land and the cost base of the original land is divided between the subdivided blocks on a reasonable basis.

For more information, see Taxation Determination TD 97/3 Income tax: capital gains: if a parcel of land acquired after 19 September 1985 is subdivided into lots ('blocks'), do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 treat a disposal of a block of the subdivided land as the disposal of part of an asset (the original land parcel) or the disposal of an asset in its own right (the subdivided block)?

When the profit is ordinary income

You may have made a profit from the subdivision and sale of land which occurred in the ordinary course of your business or which involved a commercial transaction or business operation entered into with the purpose of making a profit. In this case, the profit is ordinary income (see Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income). You reduce any capital gain from the land by the amount otherwise included in your assessable income.

 

Amalgamation of title

The amalgamation of the titles to various blocks of land that you own does not result in a CGT event happening.

Land you acquired before 20 September 1985 that is amalgamated with land acquired on or after that date retains its pre-CGT status.

Examples of CGT calculations affecting real estate

There are a number of other examples in this guide that explain how to calculate your capital gain or capital loss on the sale of real estate:

• calculation of capital gain (including worksheet), where a person can choose the indexation or discount method to calculate their capital gain, see Example 13
• calculation of capital gain on property owned for 12 months or less, see Example 9
• recoupment of expenditure affecting CGT cost base calculation, see Example 6
• deductions affecting CGT cost base calculations, see Example 53 and Example 54.

Main residence

Generally, if you are an individual (not a company or trust) you can ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence (also referred to as ‘your home’). However, special rules apply if the interest in the dwelling is held by the trustee of a Special Disability Trust. In such cases, the trustee of the Special Disability Trust will be eligible for any main residence exemption to the extent the individual principal beneficiary of the Special Disability Trust would have been if that individual principal beneficiary owned the interest in the dwelling.

To get the full exemption from CGT:

• the dwelling must have been your home for the whole period you owned it
• you must not have used the dwelling to produce assessable income
• any land on which the dwelling is situated must be 2 hectares or less
• you must not be an excluded foreign resident at the time the CGT event occurs.

If you inherited a dwelling or a share of a dwelling and it was not the deceased’s main residence, you are unlikely to get a full exemption. See Flowchart 3.6 in Appendix 3, and Inherited main residence.

You may get only a partial exemption if:

• the dwelling was your main residence during only part of the period you owned it
• you used the dwelling to produce assessable income, or
• the land on which the dwelling is situated is more than 2 hectares.

Short absences from your home (for example, annual holidays) don't affect your exemption.

If you are a foreign resident when a CGT event happens to your residential property in Australia you will no longer be entitled to claim the main residence exemption unless certain life events occur within a continuous period of 6 years of the individual becoming a foreign resident for tax purposes.

Where the deceased was a foreign resident, the changes may also apply to:

• legal personal representatives, trustees and beneficiaries of deceased estates
• surviving joint tenants
• special disability trusts.

For more information, see:

• Main residence exemption for foreign residents
• Foreign residents and capital gains tax.

If a dwelling was not your main residence for the whole time you owned it, some special rules may entitle you to a full exemption or to extend the partial exemption you would otherwise get. These rules can apply to land or a dwelling if you:

• choose to treat the dwelling as your main residence, even though you no longer live in it, see Continuing main residence status after dwelling ceases to be your main residence
• moved into the dwelling as soon as practicable after its purchase, see Moving into a dwelling
• are changing main residences, see Moving from one main residence to another
• are yet to live in the dwelling but will do so as soon as practicable after it is constructed, repaired or renovated and you will continue to live in it for at least 3 months, see Constructing, renovating or repairing a dwelling on land you already own
• sell vacant land after your main residence is accidentally destroyed, see Destruction of dwelling and sale of land.

Special rules

There are some special CGT rules that are not covered in this section that may affect you if your home was:

• destroyed and you receive money or another asset as compensation or under an insurance policy
• transferred to you as a result of its conversion to strata title, or
• compulsorily acquired, see Loss, destruction or compulsory acquisition of an asset.

If you own more than one dwelling during a particular period, only one of them can be your main residence at any one time.

The exception to this rule is if you move from one main residence to another. In this case you can treat 2 dwellings as your main residence for a limited time, see Moving from one main residence to another.

Special rules apply if you have a different main residence from your spouse or dependent children, see Having a different home from your spouse or dependent child.

If you are a foreign resident when a CGT event happens to your residential property in Australia, you will no longer be entitled to claim the main residence exemption unless certain life events occur within a continuous period of 6 years of the individual becoming a foreign resident for tax purposes.

Downsizer contributions and capital gains tax

A downsizer contribution allows people who are 60 years old and older (from 1 July 2022) or 55 years old and older (from 1 January 2023) at the time of making the contribution, to sell their home and make a contribution to superannuation based on the proceeds of the sale. This also applies to people who may otherwise be prevented from making contributions into superannuation due to:

• age
• work status
• contribution cap restrictions.

There are various criteria to be eligible to make a downsizer contribution.

To make a downsizer contribution, the capital gain or loss from the sale of the home must be disregarded, in whole or part, because the property has been treated as your main residence (for the purposes of the main residence exemption for CGT). A partial main residence CGT exemption (for the purposes of the downsizer contribution eligibility) may apply in a variety of situations, including where the home:

• was not your main residence for the entire period of ownership
• was used to produce assessable income (in whole or part) for a period of time during the ownership
• is on land greater than 2 hectares.

You may not have a capital gain or loss to disregard because, for example:

• your home was a pre-CGT asset (that is, if it was acquired before 20 September 1985)
• your spouse owned the home that was sold.

If your home was a pre-CGT asset you can still make a downsizer contribution if would be entitled to such an exemption if your home was a post-CGT asset rather than a pre-CGT asset.

If your home that was sold was only owned by one spouse, the spouse that did not have an ownership interest may also make a downsizer contribution, or have one made on their behalf, provided they meet all of the other requirements

For more information, see Downsizing contributions into superannuation.

What is a dwelling?

A dwelling is anything that is used wholly or mainly for residential accommodation. Certain mobile homes can also be a dwelling. Examples of a dwelling are:

• a home or cottage
• an apartment or flat
• a strata title unit
• a unit in a retirement village
• a caravan, houseboat or other mobile home.

Any land the dwelling is on is included as part of the dwelling, but it only qualifies for the main residence exemption if the land and the dwelling are sold together. Also, the exemption applies to a maximum of 2 hectares of land (including the land on which the dwelling is built). Any excess is subject to CGT.

A building or a unit in a building, which is a dwelling, ceases to be a dwelling once you commence converting it into commercial premises.

For more information, see Land adjacent to the dwelling.

What is an ownership interest?

In the case of a flat or home unit, you have an ownership interest if you have a:

• legal or equitable interest in a strata title in the flat or home unit
• licence or right to occupy the flat or home unit
• share in a company that owns a legal or equitable interest in the land on which the flat or home unit is constructed and that share gives you a right to occupy the flat or home unit.

In the case of a dwelling that is not a flat or home unit, you have an ownership interest if you have either a:

• legal or equitable interest in the land on which it is constructed
• licence or right to occupy it.

In the case of land, you have an ownership interest if you have either a:

• legal or equitable interest in it
• right to occupy it.

An equitable interest may include life tenancy of a dwelling that you acquire, for example, under a deceased’s will.

When do you acquire an ownership interest?

For the purposes of the main residence exemption, you have an ownership interest in a dwelling or land you acquire under a contract from the time you get legal ownership (unless you have a right to occupy it at an earlier time).

You have legal ownership of a dwelling or land from the date of settlement of the contract of purchase (or if you have a right to occupy it at an earlier time, that time) until the date of settlement of the contract of sale. This period is called your ownership period. If the dwelling is on 2 hectares of land or less, is your main residence for the whole of the ownership period and you don't use it to produce assessable income, the home is fully exempt.

Even though the settlement dates are used to calculate the period for which the main residence exemption applies, the dates you enter into the purchase and sale contracts are important.

A CGT event occurs when you enter into the sale contract. You include any capital gain in your tax return for the income year in which the CGT event occurs. The dates you enter into the purchase and sale contracts are also relevant for determining what method you can use to work out your capital gain from your main residence.

Is the dwelling your main residence?

The following factors may be relevant in working out whether a dwelling is your main residence:

• the length of time you live there (there is no minimum time a person has to live in a home before it is considered to be their main residence)
• whether your family lives there
• whether you have moved your personal belongings into the home
• the address to which your mail is delivered
• your address on the electoral roll
• the connection of services (for example, phone, gas or electricity)
• your intention in occupying the dwelling.

A mere intention to construct or occupy a dwelling as your main residence, without actually doing so, is not sufficient to get the exemption.

If you were not a resident of Australia for tax purposes while you were living in the property you are unlikely to satisfy the requirements for the main residence exemption.

In certain circumstances, you may choose to treat a dwelling as your main residence even though:

• you no longer live in it; for more information, see Continuing main residence status after dwelling ceases to be your main residence
• you are yet to live in it, but will do so as soon as practicable after it is constructed, repaired or renovated and you will continue to live in it for at least 3 months; for more information, see Constructing, renovating or repairing a dwelling on land you already own.

Moving into a dwelling

A dwelling is considered to be your main residence from the time you acquired your ownership interest in it if you moved into it as soon as practicable after that time. If you purchased the dwelling, this would generally be the date of settlement of the purchase contract. However, if there is a delay in moving in because of illness or other unforeseen circumstances, the exemption may still be available from the time you acquired your ownership interest in the dwelling.

If you could not move in because the dwelling was being rented to someone, you are not considered to have moved in as soon as practicable after you acquired your ownership interest.

As mentioned earlier, there is a special rule that allows you to treat more than one dwelling as your main residence for a limited time if you are changing main residences, see Moving from one main residence to another.

Land adjacent to the dwelling

The land adjacent to a dwelling is also exempt if:

• during the period you owned it, the land is used mainly for private or domestic purposes in association with the dwelling
• the total area of the land around the dwelling, including the land on which it stands, is not greater than 2 hectares. If the land used for private purposes is greater than 2 hectares, you can choose which 2 hectares are exempt but the land you choose must include the land on which the dwelling is built.

Land is adjacent to your dwelling if it is close to, near, adjoining or neighbouring the dwelling.

If you sell any of the land adjacent to your dwelling separately from the dwelling, the land is not exempt. It is only exempt when sold with the dwelling. There is an exception if the dwelling is accidentally destroyed and you sell the vacant land or vacant land adjacent to your dwelling is compulsorily acquired. See:

• Destruction of dwelling and sale of land
• Compulsory acquisition of part of your main residence.

Any part of the land around a dwelling used to produce income is not exempt, even if the total land is less than 2 hectares. However, the dwelling and any buildings and other land used in association with it remain exempt if you don't use them to produce income.

Other structures associated with the dwelling

A flat or home unit often includes areas (for example, a laundry, storeroom or garage) that are physically separate from the flat or home unit. As long as you use these areas primarily for private or domestic purposes in association with the flat or home unit for the whole period you own it, they are exempt on the same basis that the flat or home unit is exempt.

However, if you dispose of one of these structures separately from the flat or home unit, they are not exempt. If one of these structures is compulsorily acquired without your flat or home unit also being acquired, see Compulsory acquisition of part of your main residence.

Partial exemption for main residence

If a CGT event happens to a dwelling you acquired on or after 20 September 1985 and that dwelling was not your main residence for the whole time you owned it, you get only a partial exemption.

You calculate the part of the capital gain that is taxable as follows:

A × (B ÷ C)

Where:

• A is total capital gain made from the CGT event
• B is number of days in your ownership period when the dwelling was not your main residence
• C is total number of days in your ownership period

If a dwelling was not your main residence for the whole time you owned it, some special rules may entitle you to a full exemption or to extend the partial exemption you would otherwise get. These rules apply to land or a dwelling if you:

• choose to treat the dwelling as your main residence, even though you no longer live in it; see Continuing main residence status after dwelling ceases to be your main residence
• moved into the dwelling as soon as practicable after its purchase; see Moving into a dwelling
• are changing main residences; see Moving from one main residence to another
• are yet to live in the dwelling but will do so as soon as practicable after it is constructed, repaired or renovated and you will continue to live in it for at least 3 months; see Constructing, renovating or repairing a dwelling on land you already own
• sell vacant land after your main residence is accidentally destroyed; see Destruction of dwelling and sale of land.

Note: You can't choose to treat a building or a unit in a building as your main residence if immediately after you cease to occupy it as your main residence you commence converting it into commercial premises.

Dwelling used to produce income

Usually, you can't get the full main residence exemption if you acquired your dwelling on or after 20 September 1985, used it as your main residence and you:

• used any part of it to produce income during all or part of the period you owned it
• would be allowed a deduction for interest had you incurred on money borrowed to acquire the dwelling (interest deductibility test).

The interest deductibility test applies regardless of whether you actually borrowed money to acquire your dwelling. You must apply it on the assumption that you did borrow money to acquire the dwelling.

If you rent out part of your home, you would be entitled to deduct part of the interest if you had borrowed money to acquire the dwelling.

If you run a business or professional practice in part of your home, you would be entitled to deduct part of the interest on money you borrowed to acquire the dwelling if:

• part of the dwelling is set aside exclusively as a place of business and is clearly identifiable as such
• that part of the home is not readily adaptable for private use, for example, a doctor’s surgery located within the doctor’s home.

You would not be entitled to deduct any interest expenses if, for convenience, you use a home study to undertake work usually done at your place of work. Similarly, you would not be entitled to deduct interest expenses if you do paid child-minding at home (unless a special part of the home was set aside exclusively for that purpose). In these situations, you could still get a full main residence exemption.

If you set aside and use part of the dwelling exclusively as a place of business, you can't get a CGT exemption for that part of the dwelling by not claiming a deduction for the interest. Nor can you include interest in the cost base if you are entitled to a deduction but don't claim it.

You can still get a full main residence exemption if someone else uses part of your home to produce income and you receive no income from that person.

When a CGT event happens to the home, the proportion of the capital gain or capital loss that is taxable is an amount that is reasonable according to the extent to which you would have been able to deduct the interest on money borrowed to acquire the home.

In most cases, this is the proportion of the floor area of the home that is set aside to produce income and the period you use the home to produce income. This includes if the dwelling is available (for example, advertised) for rent.

For more information, see Rental properties guide 2024.

Home first used to produce income

If you start using part or all of your main residence to produce income for the first time after 20 August 1996, a special rule affects the way you calculate your capital gain or capital loss.

In this case, you are taken to have acquired the dwelling at its market value at the time you first used it to produce income if all of the following apply:

• you acquired the dwelling on or after 20 September 1985
• you first used the dwelling to produce income after 20 August 1996
• when a CGT event happens to the dwelling, you would get only a partial exemption, because you used the dwelling to produce assessable income during the period you owned it
• you would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before you first used it to produce income.

If all of the above apply, you must work out your capital gain or capital loss using the market value of the dwelling at the time you first used it to produce income. You don't have a choice.

A similar rule applies if you inherit a dwelling that was the deceased’s main residence and you use it to produce income, see Using a home you inherited to produce income.

Full exemption

You may have made the choice to treat a dwelling as your main residence after the dwelling ceases to be your main residence, see Continuing main residence status after dwelling ceases to be your main residence. In this case, if the dwelling is fully exempt, the ‘home first used to produce income’ rule does not apply.

In working out the amount of capital gain or capital loss, the period before the dwelling is first used by you to produce income is not taken into account. The extent of the exemption depends on the period after that time and the proportion of the home used to produce income. The following 3 examples explain this.

If the ‘home first used to produce income’ rule applies and the period between when you first used the dwelling to produce income and the CGT event happening is less than 12 months, the CGT discount method is not available.

 

If you make the choice to continue to treat a dwelling as your main residence after it ceases to be your main residence (see Continuing main residence status after dwelling ceases to be your main residence) and you don't get a full exemption, the ‘home first used to produce income’ rule may apply.

Moving from one main residence to another

If you acquire a new home before you dispose of your old one, both dwellings are treated as your main residence for up to 6 months if:

• the old dwelling was your main residence for a continuous period of at least 3 months in the 12 months before you disposed of it
• you didn't use the old dwelling to produce assessable income in any part of that 12 months when it was not your main residence, and
• the new dwelling becomes your main residence.

If you dispose of the old dwelling within 6 months of acquiring the new one, both dwellings are exempt for the whole period between when you acquire the new one and dispose of the old one.

If it takes longer than 6 months to dispose of your old home, both homes are exempt only for the last 6 months before you dispose of the old one. You get only a partial exemption when a CGT event happens to your old home.

If it takes longer than 6 months to dispose of your old home, you may get an exemption for the old home for the period in excess of the 6 months by choosing to treat it as your main residence for that period under the ‘continuing main residence status after dwelling ceases to be your main residence’ rule. If you do this, you get only a partial exemption when you dispose of your new home.

Status after dwelling ceases to be your main residence

In some cases, you can choose to treat a dwelling as your main residence even though you no longer live in it. You can't make this choice for a period before a dwelling first becomes your main residence. See Is the dwelling your main residence?

This 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
• 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 can't 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 don't 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 6 years after you stop living in it (see Example 72). 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.

You can choose when you want to stop the period covered by this choice.

For information on when and how you make a choice, see Choices.

If you rent out the dwelling for more than 6 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 6-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.

 

Home used to produce income and then you stop living in it

If you use any part of your home to produce income before you stop living in it, you can't apply the continuing main residence status after dwelling ceases to be your main residence rule to that part. This means you can't get the main residence exemption for that part of the dwelling either before or after you stop living in it.

Constructing, renovating or repairing a dwelling on land you already own

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 4 years, or a longer time if allowed by the Commissioner, 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
• 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
• continue to use the dwelling as your main residence for at least 3 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 3 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 4-year period, or a longer time if allowed by the Commissioner, 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 didn't use it to produce assessable income, and it was on land covering an area of 2 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 3 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 4 years, or a longer period if allowed by the Commissioner, or less
• you dispose of the land and new dwelling together.

The Commissioner will consider extending the 4-year period if the delay in building or renovating the dwelling was:

• beyond your control, for example the builder becomes bankrupt and is unable to complete the building or renovation.
• caused by unforeseen circumstances such as illness or injury to you or a family member that caused the work to be stopped.

If you make this choice, you can't 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 4-year, or longer if allowed by the Commissioner, 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 didn't 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 can't 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 on when and how you make a choice, see Choices.

If you were to die at any time between entering into contracts for the construction work and the end of the first 3 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:

• 4 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:

• 4 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.

If you are a surviving joint tenant, beneficiary or trustee of a deceased estate and a CGT event happens to your residential property in Australia that you inherited from a foreign resident, you will no longer be entitled to claim the main residence exemption for the deceased’s ownership period unless certain life events occurred within a continuous period of 6 years of the deceased individual becoming a foreign resident for tax purposes.

For more information, see Main residence exemption for foreign residents.

Partial exemption

If a newly constructed dwelling is built to replace an original dwelling that was demolished or destroyed more than 4 years before the new dwelling became your main residence and the Commissioner does not allow a longer period, you may be entitled to a partial exemption. You can get a partial exemption covering the period from 4 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 2 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 3 months
• you make a choice to treat the vacant land and new dwelling as your main residence in the period of up to 4 years before the new dwelling becomes your main residence
• you dispose of the land and new dwelling together.

As more than 4 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 don't make the choice, an exemption will only be available from the time the new dwelling became your 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.

Destruction of dwelling and sale of land

If your home is accidentally destroyed (such as through a natural disaster) and you then dispose of the vacant land on which it was built, you can choose to apply the main residence exemption as if the home had not been destroyed and continued to be your main residence.

You can get a full exemption for the land if you used it solely for private purposes in association with your home and it does not exceed 2 hectares. You can't claim the main residence exemption for this period for any other dwelling, except for a limited time if you are changing main residences, see Moving from one main residence to another.

You can only get this exemption where your home was accidentally destroyed. If the destruction of your home is intentional and just after the destruction you sell the vacant block of land, you can't get the main residence exemption.

Having a different home from your spouse or dependent child

If you and a dependent child under 18 years old have different homes for a period, you must choose one of the homes as the main residence for both of you for the period.

If you and your spouse have different homes for a period, you and your spouse must either:

• choose one of the homes as the main residence for both of you for the period
• nominate the different homes as your main residences for the period.

If you and your spouse nominate different homes for the period, and you own 50% or less of the home you have nominated, you qualify for an exemption for your share. If you own more than 50%, your share is exempt for half the period you and your spouse had different homes.

The same applies to your spouse. If your spouse owns 50% or less of the home they have nominated, they qualify for an exemption for their share. However, if your spouse owns more than 50% of the home, their share is exempt for only half the period you had different homes.

This rule applies to each home the spouses own, whether they have sole ownership or own the home jointly (either as joint tenants or tenants in common).

Your 'spouse' includes another person (of any sex) who:

• you were in a relationship with that was registered under a prescribed state or territory law
• although not legally married to you, lived with you on a genuine domestic basis in a relationship as a couple.

This rule applies also if you choose to treat a dwelling as your main residence when you no longer live in it, see Continuing main residence status after dwelling ceases to be your main residence, and this choice results in your having a different main residence from your spouse or a dependent child for a period.

For more information, see Choices.

 

Major capital improvements to a dwelling acquired before 20 September 1985

If you acquired a dwelling before 20 September 1985 and you make major capital improvements after that date, part of any capital gain you make when a CGT event happens to the dwelling could be taxable. Even though you acquired the dwelling before CGT started, major capital improvements are considered to be separate CGT assets from the original asset, and may therefore be subject to CGT in their own right if you make them on or after 20 September 1985.

If the dwelling is your main residence and you use the improvements as part of your home, they are still exempt. This includes improvements on land adjacent to the dwelling (for example, installing a swimming pool) if the total land, including the land on which the home stands, is 2 hectares or less.

However, if the dwelling is not your main residence or you used the improvements to produce income for any period, the part of any gain that is attributable to the improvements for that period is taxable.

A capital improvement to an existing structure, such as a renovation to your house, is taken to be major if its original cost (indexed for inflation if the improvements were made under a contract entered into before 11:45 am AEST on 21 September 1999) is:

• more than 5% of the amount you receive when you dispose of the dwelling, and
• greater than a certain threshold. The threshold increases every income year to take account of inflation. Improvement thresholds for 1985–86 to 2023–24 are shown in Table 1.

When you dispose of the dwelling, you calculate the capital gain or capital loss on the major improvements by taking away the cost base of the improvements from the proceeds of the sale that are reasonably attributable to the improvements:

A = B − C

Where:

• A is capital gain on major improvements
• B is proceeds of sale attributable to improvements
• C is cost base of improvements.

You can choose to calculate the capital gain made on the improvements using either the indexation or the discount method if:

• the improvements were made under a contract entered into at or before 11:45 am AEST on 21 September 1999
• the dwelling was sold after that time, and
• you owned the improvements for at least 12 months.

If you entered into the contract to make the improvements after 11:45 am AEST on 21 September 1999 and you owned them for more than 12 months, you can calculate your capital gain using the CGT discount of 50%.

In calculating the amount of capital proceeds to be attributed to the improvements, you must take whatever steps are appropriate to work out their value. If you make an estimate of this amount, it must be reasonable and you must be able to show how you arrived at the estimated amount.

Buildings or structures constructed on land acquired before 20 September 1985

Buildings or structures constructed on or after 20 September 1985 on land acquired before that date are also considered to be separate CGT assets from the original land. The major capital improvement threshold and 5% of capital proceeds rules don't apply to them. Therefore, they may be subject to CGT if you use them other than as your main residence.

Dwellings transferred after marriage or relationship breakdown

Special rules apply to dwellings transferred to you from a spouse, or a company or trustee of a trust, if the marriage or relationship breakdown rollover applies.

For more information, see Real estate and main residence.

Inherited main residence

If you inherit a deceased person’s dwelling, you may be exempt or partially exempt when a CGT event happens to it. The same exemptions apply if a CGT event happens to a deceased’s estate of which you are the trustee. Flowchart 3.6 in Appendix 3 sets out the full exemption rules if you inherit a dwelling. Alternatively, the rules are set out below.

If you are a joint tenant and another joint tenant dies, their interest in the dwelling is taken to pass in equal shares to you and any other surviving joint tenants on that date.

For the purpose of the main residence exemption, you are treated as if that interest in the dwelling has passed to you as beneficiary of the deceased estate, which means the following rules apply to that interest.

If you are a surviving joint tenant, beneficiary or trustee of a deceased estate and a CGT event happens to your residential property in Australia that you inherited from a foreign resident, you may no longer be entitled to claim the main residence exemption for the deceased’s ownership period, depending on the length of time the deceased had been a foreign resident.

If you inherit an Australian residential property from a deceased person who had been a foreign resident for 6 years or less at the time of their death, the main residence exemption that the deceased accrued for the dwelling is available to you as the beneficiary. The main residence exemption means you may not pay CGT on any capital gain made after you sell or dispose of the inherited property, depending on the use of the property by both you and the deceased.

If you inherit an Australian residential property from a deceased person who had been a foreign resident for more than 6 years at the time of their death, any main residence exemption that the deceased person may have accrued for that dwelling is not available to you. This means you may have to pay CGT when you sell or dispose of the property.

If you inherit an Australian residential property and you have been a foreign resident for more than 6 years when you sell or dispose of the property, you can't claim the main residence exemption for your ownership period.

For more information, see Foreign residents and inherited property.

Full exemption

A full exemption will be applied depending on when the deceased died and when they acquired the property.

Deceased died before 20 September 1985

As you acquired the dwelling before 20 September 1985, any capital gain you make is exempt. However, major capital improvements you make to the dwelling on or after 20 September 1985 may be taxable, see Major capital improvements to a dwelling acquired before 20 September 1985.

Deceased died on or after 20 September 1985

A. The deceased acquired the dwelling before 20 September 1985 (it does not matter whether the dwelling was the main residence of the deceased person).

You may have an ownership interest in a dwelling that passed to you as a beneficiary in a deceased estate or you may have owned it as trustee of a deceased estate. In either case, you disregard any capital gain or capital loss you make from a CGT event that happens to the dwelling if either of the following 2 conditions applies.

1. You disposed of your ownership interest within 2 years of the person’s death, that is, if the dwelling was sold under a contract, settlement occurred within 2 years. This exemption applies whether or not you used the dwelling as your main residence or to produce income during the 2-year period. The Commissioner has the discretion to extend the 2-year period for CGT events (such as a sale) happening in the 2008–09 income year and later years, see Commissioner may extend the 2-year time period.
2. From the deceased’s death until you disposed of your ownership interest, the dwelling was not used to produce income and was the main residence of one or more of
   1. a person who was the spouse of the deceased immediately before the deceased’s death (but not a spouse who was permanently separated from the deceased)
   2. an individual who had a right to occupy the home under the deceased's will (including a right to occupy the home as a result of a court order under the relevant family provision legislation that takes effect as if it had been made as a codicil to the deceased's will)
   3. you, as a beneficiary, if you disposed of the dwelling as a beneficiary.

The dwelling can be the main residence of one of the above people (even though they may have stopped living in it) if they choose to treat it as their main residence under the continuing main residence status after dwelling ceases to be your main residence rule.

The requirement that the dwelling is the main residence of an individual who had a right to occupy it under the deceased’s will is satisfied if the individual moves into the dwelling when it is first practicable to do so. This requirement will be satisfied where the delay in moving is because the dwelling can't be occupied until probate and administration of the estate is granted.

B. The deceased acquired the dwelling on or after 20 September 1985.

You disregard any capital gain or capital loss you make when a CGT event happens to the dwelling or your ownership interest in the dwelling if either of the following 2 points applies.

1. Condition 2 in A above is met and the dwelling passed to you as beneficiary or trustee on or before 20 August 1996. For this to apply, the deceased must have used the dwelling as their main residence from the date they acquired it until their death, and they must not have used it to produce income.
2. One of the conditions in A above is met, and the dwelling passed to you as beneficiary or trustee after 20 August 1996, and just before the date the deceased died it was      
   1. their main residence
   2. not being used to produce income.

A dwelling can still be regarded as the deceased’s main residence even though they stopped living in it, see Continuing main residence status after dwelling ceases to be your main residence.

Partial exemption

If you don't qualify for a full exemption from CGT for the home, you may be entitled to a partial exemption.

You calculate your capital gain or capital loss as follows:

Capital gain or capital loss amount × (non-main residence days ÷ total days)

Non-main residence days

‘Non-main residence days’ is the number of days that the dwelling was not the main residence.

1. If the deceased acquired the dwelling before 20 September 1985, non-main residence days is the number of days in the period from their death until settlement of your contract for sale of the dwelling when it was not the main residence of one of the following
   1. a person who was the spouse of the deceased (except a spouse who was permanently separated from the deceased)
   2. an individual who had a right to occupy the dwelling under the deceased’s will
   3. you, as a beneficiary, if you disposed of the dwelling as a beneficiary.

Total days

1. If the deceased acquired their ownership interest before 20 September 1985, ‘total days’ is the number of days from their death until you disposed of your ownership interest.
2. If the deceased acquired the ownership interest on or after 20 September 1985, total days is the number of days in the period from when the deceased acquired the dwelling until you disposed of your ownership interest.

A further adjustment may be required if the dwelling was a main residence, but was partly used to produce income, for example, if, for a period, part of it was rented out or used as a place of business.

If you dispose of your ownership interest in a dwelling within 2 years of the person’s death, you can ignore the main residence days and total days in the period from the person’s death until you dispose of the dwelling if this lessens your tax liability. See Commissioner may extend the 2-year time period.

You also ignore any non-main residence days before the deceased’s death in calculating the capital gain or capital loss if:

• you acquired the dwelling after 20 August 1996
• the dwelling was the deceased’s main residence just before their death
• the dwelling was not being used to produce income at the time of their death, and
• the deceased was not a foreign resident for a continuous period of more than 6 years just before the deceased's death.

Using a home you inherited to produce income

If a person acquired their main residence on or after 20 September 1985, and they died and it passed to you as a beneficiary (or as trustee of their estate) after 20 August 1996, you are taken to have acquired the dwelling at its market value at the time you first used it to produce your income if:

• you first used the dwelling to produce income after 20 August 1996
• when a CGT event happens to the dwelling, you would get only a partial exemption because you used the dwelling to produce assessable income during the period you owned it
• you would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before you first used it to produce income
• the CGT event did not happen to the dwelling within 2 years of the person’s date of death.

If all of the above apply, you must work out your capital gain or capital loss using the market value of the dwelling at the time you first used it to produce income. You don't have a choice.

Cost to you of acquiring the dwelling

If you acquire a dwelling the deceased had owned, there are special rules for calculating your cost base.

These rules apply in calculating any capital gain or capital loss when a CGT event happens to the dwelling.

The first element of the cost base and reduced cost base of a dwelling (its acquisition cost) is its market value at the date of death if either:

• the dwelling was acquired by the deceased before 20 September 1985
• the dwelling passes to you after 20 August 1996 (but not as a joint tenant), and it was the main residence of the deceased immediately before their death and was not being used to produce income at that date.

In any other case, your acquisition cost is the deceased’s cost base and reduced cost base on the day they died. You may need to contact the trustee or the deceased’s recognised tax adviser to obtain the details. If that cost base includes indexation, you must recalculate it to exclude the indexation component if you prefer to use the discount method to work out your capital gain from the property.

If you are a beneficiary, the cost base and the reduced cost base also include amounts that the trustee of the deceased’s estate would have been able to include in the cost base and reduced cost base.

Continuing main residence status

If the deceased was not living in the home at the date of their death, they or their trustee may have chosen to continue to treat it as their main residence. You may need to contact the trustee or the deceased’s recognised tax adviser to find out whether this choice was made. If it was, the dwelling can still be regarded as the deceased’s main residence:

• for an indefinite period, if the dwelling was not used to produce income after the deceased stopped living in it, or
• for a maximum of 6 years after they stopped living in it, if it was used to produce income after they stopped living in it.

Commissioner may extend the 2-year time period

A trustee or beneficiary of a deceased estate may apply to the Commissioner for an extension of the 2-year time period. Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example:

• the ownership of a dwelling or a will is challenged
• the complexity of a deceased estate delays the completion of administration of the estate
• a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the 2-year period (for example, the taxpayer or a family member has a severe illness or injury), or
• settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee’s control.

These examples are not exhaustive.

In exercising the discretion, the Commissioner will also take into account whether and to what extent the dwelling is used to produce assessable income and for how long the trustee or beneficiary held the ownership interest in the dwelling.

In certain circumstances you may be eligible to use the safe harbour to extend the 2–year period without having to apply to the Commissioner to exercise discretion. For more information, see Extensions to the 2-year ownership period.

Inheriting a dwelling from someone who inherited it themselves

The formula for calculating the partial main residence exemption is adjusted if the deceased individual also acquired the interest in the dwelling on or after 20 September 1985 as a beneficiary (or trustee) of a deceased estate. The main residence exemption is calculated having regard to the number of days the dwelling was the main residence of yourself and the previous beneficiaries.

For more information, see Deceased estates.

Death during construction

If an individual entered into a contract to construct, repair or renovate a home on land they already owned, and they die before certain conditions are met, the trustee may choose to have the home and land treated as the deceased’s main residence for up to 4 years before the home became (or was to become) their main residence.

The trustee can make this choice if the deceased dies before:

• the home is finished
• it was practicable for the home to be their main residence
• they had lived in the home for 3 months.

If the trustee makes this choice, no other dwelling can be treated as the deceased’s main residence during that time.

If the trustee of a deceased estate disposes of residential property in Australia that was owned by a foreign resident, the trustee may no longer be entitled to claim the main residence exemption for the deceased’s ownership period.

For more information, see Main residence exemption for foreign residents.

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