Can my second house be temporarily exempted from tax?

The short answer is: yes it can. But it is always best to know all the details before making any big decisions!

The Income Tax Assessment Act 1997 (ITAA 1997) states that a new home that is bought before selling an existing home can also be treated as your tax-exempt main residence for up to a period of six months.

The two homes can be treated as a tax-exempt main residence for the lesser of:

The six-month period immediately before the existing home is sold; or
The period between the purchase of the new home and the sale of the existing home.

As long as you manage to sell off your existing home within six months of purchasing your new one, both will be considered as your main residences and will be exempt from tax.

What if I own both homes for more than six months?

If the period in which you own both homes exceeds six months, a partial capital gains tax (CGT) exemption will apply for the period in excess of six months. The partial exemption will be calculated on a pro-rata basis.

The home that this CGT exemption will be applied to will depend on which one did not qualify as your main residence during the excess period.

The relevant time period of ownership of the two homes is determined by reference to the settlement dates on the sale contracts.

Other conditions

The other requirements for the two homes to be exempt from tax are:

the existing home must have been the taxpayer’s main residence for at least three of the 12 months before the taxpayer’s ownership ends; and
the existing home must not have been used to produce assessable income in any part of the 12-month period when it was not the taxpayer’s main residence.

However, there is an “absence concession” that can be used to allow the existing home to qualify for the tax exemption even if it was rented out during the 12-month period.

This can happen because the concession allows the homeowner to treat the existing home as a main residence even when they are not around.

Need help?

At Aero, we specialize in tax returns involving investment properties.

Feel free to contact us if you need any assistance with the management of your tax affairs.