Buying a new home before selling the old one: Main Residence Exemption (MRE) tax issues?

Buying before selling your main residence can still qualify for the main residence exemption if 2 key requirements are met

Moving home in the current market

Normal or buyers’ Market – Selling before buying a new home is normal

Historically in a neutral or buyer’s market, you would typically want to sell your home before buying a new one.

To avoid the situation whereby you would be put under pressure to accept offers lower than you may want on your existing home for fear of missing out (FOMO) on your dream new home.

Currently, however, we are in – A Sellers’ Market – Buying before Selling can work

In the current property market at the time of writing this blog, we often find clients considering buying a new home before selling their current home. As it’s currently easier to sell your home than it is to buy a new home, which is pretty much the opposite of a balance to buyers’ market that operates during most of the property cycle.

Also, cashed-up buyers will wish to buy a new home before selling their existing home, with the preferential treatment they will get over buyers subject to the sale of their existing home.

So what are the tax issues around MRE?

6 months rule!

6 Months MRE Rule

When Individuals or couples want to buy a new home before selling their existing one, certain tax concessions under the MRE will allow for both homes to be treated as the main residence for up to six months – but only if certain conditions are met.

Section 118-140 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that both the old and new homes can be treated as the taxpayer’s main residence (MRE) for the lesser period of:

■ The six-month period immediately before the sale of the existing home, or

■ The period between the purchase of the new home and the sale of the existing home.

So, if it takes less than six months to settle on the sale of their original home after having settled on the sale of their new home, then both homes can be treated as the main residence during this period.

Note that s 118-140  ITAA 1997 refers to the acquiring and ending of “ownership interests” – which means that the relevant time periods are measured by reference to the settlement dates of contracts of sale (per s118-130(2) and (3)). This means that for both homes to be treated as the taxpayer’s main residence if the settlement of the contract for the sale of the original home must occur within six months of the settlement of the contract for the purchase of the new home for there to be a full exemption (MRE) applicable to both houses.

On the other hand, if more than six months pass between the settlement of the new home and the (later) settlement of the original home, both dwellings will only be treated as the main residence for a maximum period of six months before the settlement on the original home.

In the latter instance, a partial CGT exemption will apply during the excess period (i.e., after the maximum of six months) to either the original or new home. Which of them it is will depend on which did not qualify as the taxpayer’s main residence?

Other than the fundamental requirement that the new home must become the taxpayer’s main residence, the other two key requirements that must be met for the concession to apply are:

2 key requirements

■ The existing home must have been the taxpayer’s main residence for at least 3 of the 12 months before the taxpayer’s “ownership interest” in it ends, and

■ The existing home must not have been used to produce assessable income in any part of that 12-month period when it was not the taxpayer’s main residence, however, see also the exemption under the 6-year absent rule in S 118-145 ITAA 1997.

6-year absent rule!

Absent Rule up to 6 Years

That said, an absence concession exists that can be used to allow the original home to qualify as a main residence — including where it may have been rented in that 12-month period. This is because the effect of the absence concession is to continue to “treat” the original home as the taxpayer’s main residence — notwithstanding any absence and any income used in this period.

Example - Absence and 6 months rule working together

John & Mary

John & Mary purchase their main residence on 15th January 2015, where they lived until John got a job opportunity overseas in May of 2018, at the same time renting their home while overseas, then returning on the 1st of February 2021. After renting their original home for less than 6 years. On returning the couple purchased a new home ready to move in on arrival on the 1st February 2021 and listed their original home for sale, which settled on 1st May 2021. In this example, John & Mary are considered Australian Tax Residents, if not, see our blog Foreign resident – No MRE for CGT

As the period between the new home settlement and the current home settlement was less than 6 months both will be exempt from any CGT. If the original home is settled after 9 mths from the settlement of the new home, there will be a pro-rated exemption, exposing the new home to 3 months when it's sold in the future.

Vacant land with a partially constructed home

*Note that that purchased vacant land or land with a partly constructed building on it can also be treated as the taxpayer’s new home for the purposes of the concession.

ATO Data matching is more likely in the future to review if that MRE is fully or partially exempt from CGT

Finally, it should be noted that the matter of whether a partial exemption may arise on the changing of main residences may now be a more significant matter given that transactions involving real property are now subject to data matching.

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