Demolishing your main residence may have CGT implications

When you sell land that you became the owner of on or after 20 September 1985, you must calculate any capital gain made on the sale as part of your income.

If that land has a dwelling that you use as your main home for the entire period of ownership, you are then able to apply the main residence exemption to discount the entire capital gain to nil.   However some owners mistakenly believe that if the land has been their main residence, it will always have the benefit of the exemption. This is not correct.  If the residence has at any time of its ownership been used for income producing purposes, the exemption must be apportioned.  This may include if you have claimed home office deductions due to declaring part of your property as being used by your business.

Another common trap is to demolish the house. The taxation legislation requires that for the exemption to apply there must be a dwelling. (Note: The term "dwelling" may have far reaching definitions to include semi-permanent structures - consideration will be given on a case by case basis). 

Demolition of the house is regarded as a CGT event and a deemed disposal of the property. Generally you will not receive any capital proceeds for the demolition, so there is no capital gain or loss. But if you then sell the vacant land, or subdivide and sell the new lots, you must account to the Australian Taxation Office for any capital gain you make on the sale. Because there is no dwelling on the land at the time of disposal, you are not even entitled to claim a partial exemption for the period when there was a dwelling occupied as your main residence you sell.

If you are contemplating selling your home as a development site, or undertaking a subdivision and selling as vacant lots, the main residence exemption will only be available if the sale occurs whilst a dwelling that is your main residence remains on the land you sell. Remember that CGT events occur on the date of the signing of the sale contract - not the settlement date, so you can demolish the house after contract date but before settlement date and still claim the exemption.

If you decide to rebuild after demolishing the house, the main residence exemption can still be claimed if:

  • you make an election to treat the vacant land as your main residence from the time the demolished house was last occupied by you; AND
  • there is no more than 4 years between the time of last occupation of the demolished dwelling and the time the new house becomes your main residence.