For current homeowners, accessing a capital gain on the sale of their main residence tax-free can be one of the most profitable decisions made.

For example: Sam is 68 years old and has just sold his home for $600,000, deriving a capital gain of $400,000. He has lived in the home for the last 10 years and is able to access the main residence exemption, formerly known as the "principal place of residence" or "PPR" exemption.

To derive an additional $400,000 for retirement, Sam would have had to work for quite a few more years or achieve incredible returns on investments in order to save this amount in 'after tax dollars'.

Main Residence Exemption
Under the Capital Gains Tax Main Residence Exemption, the term "residence" or "dwelling" includes a home, an apartment, a unit in a retirement village, a caravan, a houseboat and a mobile home.

Whether a dwelling is a person's main residence depends on the facts in each case. The Australian Taxation Office (ATO) may consider the following factors relevant:

• Whether the person has moved their personal belongings into the dwelling;
• The address to which the person has their mail delivered;
• The person's address on the electoral roll;
• The person's address on their driver's licence, bank statements and other documents;
• The connection of services such as telephone, gas and electricity;
• The person's intention to occupy the dwelling;
• The place of residence of the person's family; and
• The length of time that the person has lived there.

It is recommended that if you stay less than twelve months in a residence, that you retain such documentation as invoices from the removalists and telephone records to prove that you did occupy the dwelling as your main residence, or 'home' during a period of time.

HOW LONG DO YOU HAVE TO LIVE IN THE PROPERTY?

1 Year or 2 Years?
The Capital Gains Tax legislation does not specify a minimum time period in which the person is required to live in the dwelling in relation to the main residence exemption.

Assuming that the person has satisfied the relevant factors, the main residence may be available for occupation for less than twelve months.

To access the concessional rates of stamp duty, for principal residence, a minimum period of twelve months occupation is required. Therefore, if you sell your home prior to twelve months, you will be required to pay back a pro-rata portion of stamp duty, even though the capital gain may be tax-free.

Case Study
The tax savings of accessing the main residence exemption can be substantial.

For example:
Adam purchases a property on 1 August 2000 for $380,000, including stamp duty. He lives in this property for ten months, is posted to Sydney for work, and then subsequently moves out.

He rents it out for the following 2 years and sells it on 1 August 2003 for net capital proceeds of $580,000. He has derived a $200,000 capital gain in the 2004 financial year.

Adam is able to access this capital gain tax-free as follows.

Capital Gain derived $200,000
(Less) Main Res. Exemption ($200,000)
Net Assessable Capital Gain nil

Therefore, Adam is able to pocket the total sale proceeds received tax-free

The Six-Year Exemption Rule
If a person first occupies a dwelling as their main residence, and then they subsequently rent it out, the dwelling may continue to be treated as a main residence for a maximum period of six years. The six-year time period relates to the period in which the dwelling is rented out derives income.

For example:
Maria purchases and lives in her own house in Brisbane for two years. She is then posted to Sydney for work for the next four years during which time she rents out the house. On her return, she decides to sell the house and derives a Capital Gain of $200,000.

Maria can apply the main residence exemption for 100 per cent of the capital gain, even though she has rented the house out for four years, and will receive the $200,000 gain tax-free.

6 Month Rule - Moving from one main residence to another
If you acquire a new home before you dispose of your old one, both dwellings can be treated as your main residence for a period of up to six months under certain conditions, including a limitation on renting out the old home for a period prior to disposal.

For example:
Ben and Eva bought their new home under a contract that was settled on 1 January 2003 and moved in immediately. They sold their old home under a contract that was settled 15 April 2003. Both the old and new homes are treated as their main residence for the period 1 January 2003 to 15 April 2003 even though they did not live in the old home during that period.

Pre September 1985 Acquisitions
Generally, you can disregard any capital gain you make on the sale of any property, (i.e. an investment property or your home), that you purchased before 20 September 1985.

You bought a waterfront house on the Gold Coast in 1984 and a home in Ascot, Brisbane in 1990 and lived in both dwellings until the present day. The Ascot home was not rented out during this time and the Gold Coast property was used as a holiday home and rented out for periods of time.

If you decide to sell both homes tomorrow and derive, say, an $800,000 capital gain on each, both gains will be tax-free as follows:

Property Exemption Gain Tax
Ascot Main Res. $800,000 nil
Gold Coast Pre Sep 1985 $800,000 nil

50% Discount Concession
Even on the sale of an investment property, there is still the 50% Discount concession available to vendors. The key features of this 50% discount are as follows:

• The relevant asset must have been owned for at least twelve months;
• It applies to individuals, partnerships, trusts (subject to conditions) and complying superannuation funds;
• The discount is 50% for individuals and where applicable, certain trusts and partnerships and 33 and 1/3% for complying superannuation funds; and The discount is applied to non-indexed capital gains.

For example:
Craig purchases an investment property at Parkwood on the Gold Coast on 1 July 2001 for $280,000 including stamp duty. He rents it out for 2 years and 2 months and sells it on 1 September 2003 for net capital proceeds of $480,000. He has derived a $200,000 capital gain in the 2004 financial year.

Craig is able to apply the 50% Discount Concession on this capital gain as follows:
Capital Gain derived $200,000
(Less) 50 % General Dis't ($100,000)
Net Assessable Capital Gain $100,000
Assuming that Craig was on the top marginal tax rate of 48.5 per cent, the taxation saving available to him would be $48,500

Prior to using the 50 per cent discount rule, you should seek advice from your certified practising accountant as to whether or not this option offers a greater benefit than the cost base indexation rule.

It is worthwhile reviewing your ability to access the main residence exemption and other concessions in respect of your buying and selling property.

Capital gains on real estate are excellent. Tax-free capital gains on real estate are even better.
Extract from Article by Peter Meyers

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