Exclusions to the bright-line rule
When you sell residential property there are situations when the bright-line property rule does not apply.
- The property is your main home.
- You inherited the property.
- You're the executor or administrator of a deceased estate.
The main home exclusion
If you are selling a property you need to decide if it's your main home. You can only have 1 main home. It is the property you have the greatest connection to.
You can use the main home exclusion under the bright-line property rule if the following 2 situations apply.
- You have used a property as your main home for more than 50% of the time you’ve owned it.
- You have used more than 50% of the property's area (including your backyard, gardens and garage).
It's important to note that having the intention to use the property is not enough, you must have actually used it for this purpose.
You can only use the main home exclusion twice over any two-year period.
If you use part of your house as a business or it has a rental property attached, using more than 50% of the property's area is important. For example, if you use 40% of a property as your home and rent out 60% as a granny flat, you cannot use the main home exclusion if you sell that property.
If you live in more than 1 property
If you own and live in more than 1 property, you must decide which is your main home. To decide if a property is your main home, think about:
- where your personal property is kept
- the amount of time you spend living in each property
- where your immediate family lives
- where your social ties are strongest
- your use of the home
- what other ties such as employment, business, economic you have with the community.
A main home held in trust
Residential properties held in trust can use the main home exclusion under the bright-line property rule if each of the following conditions apply.
- The house sold was the main home of a beneficiary of the trust, the principal settlor of the trust, or the principal settlor did not have a main home.
- It is the main home of the principal settlor of the trust, or the principal settlor does not have a main home.
If you need help to work out if your property sale is excluded from the bright-line property rule, talk to a tax advisor.
Inheriting a residential property
Property which is inherited does not come under the bright-line test when it's sold by the person who inherited the property. However if any part of the property is acquired other than by inheritance it may be subject to bright-line.
Example: Paul and Mel inherit a property
Paul and Mel are each left a half-share in a residential property.
Mel sells his half-share to Paul at market value on 12 April 2019. Paul is now the only owner of the property.
He sells this property on 15 March 2020. Because he has sold the property within 5 years of buying Mel's half-share - he will pay tax on 50% of any gain he makes on the sale.