As mentioned in our previous blog (Four year construction rule when you buy vacant land or renovate), the main resident exemption is the concept whereby your home (otherwise known as your main residence) is exempt from capital gains tax (CGT). Under the four year construction rule, you can choose to treat your new house as if it were your main residence for up to four years before it actually becomes your main residence.
This concession is also available if you decide to subdivide your existing home and move into the newly constructed house on the subdivided block. The effect of applying the four year construction rule in this circumstance is slightly different to when you purchase a new property as per the previous blog.
If you subdivide your home and construction of the new house takes less than four years, the main residence exemption will apply to the new house for the four years prior to moving in, including part of the time before the land had been subdivided. So say you purchase your original house in January 2008 and subdivide you family home in May 2011. Construction is completed in October 2013 and you move in straight away. Using the four year construction rule, you are able to claim the main residence exemption for the four years immediately before you move in to the subdivided lot, which is October 2009 (so before you subdivided).
Similarly to the previous blog, if construction of your new house on the subdivided lot takes more than four years from the time subdivided to the time you move in, then the exemption is limited to the four years immediately before the property becomes your main residence.
Pro tips:
- Remember, you can only treat one property as your main residence at any time. This means if you choose to apply the four year construction rule to the new residence on your subdivided lot, your original property would be liable to CGT.
- If you elect to use the four year construction rule, you must move into your new home as soon as practicable after it is completed and you must live in it for at least three months to be able to use this concession.
Author: Tessa Jachmann
Email: tessa@faj.com.au
