Generally, if a house is classified as your main residence (meaning it is your home), then it is exempt from capital gains tax (CGT). This concept is referred to as the main residence exemption.
If you buy a vacant lot that you plan to build your new house on, or if you buy an existing home that you are renovating before you move in, then you are able to claim the main residence exemption from the date that you move in to your new house.
However 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 allows you to apply the main residence exemption for a period of up to four years immediately before the date you move in to that house, during which time your new house is either being constructed, repaired, or renovated.
The effect of this concession depends on your circumstances. If construction or renovations take less than four years from the time you purchased your new property, then the main residence exemption will apply for the entire ownership period. An example of this is if you purchased your new property in May 2011 and completed renovations/construction by October 2013 and move in straight away. In this circumstance, you can claim the main residence exemption for the entire time as the time between purchasing your property & moving into it is less than 4 years.
If renovations or construction take more than four years from the time you purchased or subdivided to the time you move in, then the exemption is limited to the 4 years immediately before the property becomes your main residence. So working on the above example, say you purchase the new property in May 2011 but renovations or construction aren’t completed until October 2016 – in this case, the main residence exemption can be applied from October 2012. This means you may be liable to pay capital gains tax for the period from May 2011 to October 2012.
However, it is important to note that you can only elect to use the four year construction rule if the following conditions are met:
• The new home becomes your main residence as soon as practicable after it is completed
• The new home continues to be your main residence for at least three months.
Pro Tip:
- No other dwelling can be treated as your main residence (i.e. exemp from CGT) during the construction period, however there is a rule for changing main residences where you may be able to treat both homes as your main residence for a six month period.
Accountant: Tessa Jachmann
Email: tessa@faj.com.au
