Terms
Main Residence: Also known as Principle Place of Residence (PPOR). Generally, a dwelling is considered to be your Main Residence if; you and your family live in it, your personal belongings are in it, its where mail is delivered, its your address on the electoral role, utilities such as gas & power are connected.
Main Residence Exemption: Your main residence is exempt from CGT if you’re an Australian resident and the dwelling:
Has been the home of you/partner/dependents the whole period you have owned it
Hasn’t been used to produce income (run a business from it, rented it out, ‘flipped it’ [i.e. reno + sell at profit]
Is on land of 2 hectares or less
Cost Base / Basis: The cost basis of a property is what it cost you to acquire and hold the property, used to calculate your capital gain or loss when you sell including: Purchase Price (or Deemed Acquisition Value if applicable), Stamp Duty, Legal Fees & Conveyancing costs.
Capital Proceeds: What you receive when you dispose of a property (for now just sale price, but there are other things like insurance payout etc)
Capital Gain or Loss: Capital Cain = Capital Proceeds - Cost Base
Assessable Capital Gain: The assessable capital gain is the portion of your capital gain from the sale of a property that is included in your taxable income for the year after applying relevant exemptions.
6 Year Rule: A CGT concession allowing you to treat a former main residence as your main residence for up to 6 years after you move out if it is used to produce income (e.g. rented out)
You must not have declared another main residence during this time
If you move back in, the 6-year clock resets
Home first used to produce income rule: If your home was first used to produce income after 20 August 1996, the cost base for CGT is reset to the market value at that time - not the original purchase price. This affects how much CGT is calculated if sold later.
Deemed Acquisition Date: This is when the ATO treats you as having acquired the property on a different date than the actual purchase date. Common scenarios include:
First used to produce income: If you first rent out your home after 20 August 1996, you’re deemed to have acquired it at its market value on that date. (This is the only current scenario)
Change of ownership structure (e.g. Transferring a property to a trust/company)
Inheritance: You’re deemed to have acquired the property at the deceased's date of death.
Deemed Acquisition Value: When a deemed acquisition date applies, the property’s cost base resets to the market value at that deemed date, rather than the actual amount you paid. This applies:
Under the "home first used to produce income" rule
In CGT rollover events (e.g. marriage breakdown, certain inheritance scenarios)
Overview;
When calculating Capital Gains for Property we’re looking to answer three questions.
What is the Capital Gain
On the surface this is fairly simple;
Capital Gain or Loss = Capital Proceeds - Cost Base.
If you’ve read the terms above you’ll know that Capital Proceeds is just what you sold the property for. Cost Basis can be a bit more complex because of deeming… the most likely case where deeming impacts CGT is if property which was previously your main residence AND did not produce income, produces income for the first time.
Effectively what “deeming” means is that the Market Value of the property on the day that was first used to produce income is the new initial Cost Basis and the acquisition date is that day as well… so we effectively completely ignore history prior to that date.
What is the Assessable Capital Gain
For this - lets look at four different scenarios which will help articulate this concept.
The two most common scenarios:
Scenario 1: Always a main residence & not income producing:
Property that has always been your main residence AND has not been used to produce income is simple to calculate CGT implications on - the Main Residence exemption means that the Assessable Capital Gain = 0.
There are some slight nuances to the main residence exemption (e.g. hectares) which you can find above in the terms.
Scenario 2: Never a main residence
Never a main residence: Property that is not your main residence and has never been is simple to calculate CGT implications on - you simply do Assessable Capital Gain = Capital Proceed - Cost Basis.
If it hasn’t always been one of these simple scenarios we have to work out from the Capital Gain - what portion of the Capital Gain is Assessable.
Scenario 3: An Investment Property that becomes a main residence including having a room rented out to just a main residence
Period 1 (Pink): The property was not a Main Residence during this time so this entire time period is assessable. There’s 731 Days from 1 Jan 2020 (midnight) to 1 Jan 2022 (midnight). To calculate the assessable impact from this time period we do:
731 (days in this period) / 2557 (i.e. total days the property was held)
x 100% since there’s no main residence exemption
x Capital Gain $500,000
Period 2 (Aqua): The property was a Main Residence during this time BUT also had an income generating portion. There’s 730 days from 1 Jan 2022 (midnight) to 1 Jan 2024 (midnight) note that there’s one day less than period 1 as period 1 includes a leap year. To calculate the assessable impact form this time period do:
730 (days in this period) / 2557 (i.e. total days the property was held)
x 0.25 since only 25% of the property is income generating and its the main residence
x Capital Gain $500,000
Period 3 (Blue): The property was the Main Residence and not producing income. This period is exempt from capital gains.
We end up with an Assessable Capital gain of $178, 626.
Limitations:
We track only a single main residence at a time, typically before people are married they may claim an individual main residence separately.