Limitations of the Capital Gains Tax Main Residence Exemption

As seen in Woopi News January 2023

Generally, when you sell a property that has been your home you may be entitled to a capital gains tax exemption or partial exemption. There are however some limitations to this exemption.

When selling rural land, it’s important to be aware that only 2 hectares (approx 5 acres) is captured under the main residence exemption. You should consult the sales agent if the land being sold is more than 2 hectares to obtain a split of the sales proceeds that shows the value of the house and surrounding 2 hectares and the value of the excess land. You will also need to calculate this percentage for the cost base when you purchased the property, as it is unlikely to be the same percentage. You would then only incur a taxable capital gain on the growth in value of the excess land. As some circumstances can be complex, particularly where there are multiple adjacent lots (multiple titles), it’s important to obtain advice specific to your circumstances.

When moving to a new residence, there is an allowance of 6 months where you can hold two main residences at the same time. This is achievable when you buy a house, move in, and then sell the old home. However, it is particularly interesting at present for those building homes. If you purchase land to build and the new home once complete becomes your main residence, then you sell your previous main residence, you will most likely have a capital gains issue as it is currently taking longer than 6 months for homes to be built. For capital gains, the date you sign the contract to purchase the land is the date that you are taken to own the new property, not the day you eventually move in. The question is, is it better to calculate the capital gain on the old home for the overlapping period or on the new land and how do we work out the capital gain? It’s well worth seeking advice if you have a new come under construction or are thinking of building to ensure that you are aware if capital gains tax is likely to be an issue.

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