When selling your home in Australia, Capital Gains Tax (CGT) may be fully exempt – but only under certain conditions. One
key area to understand is how CGT applies to land adjacent to your home. This article breaks down the rules in simple terms
to help you determine whether you qualify for the exemption.
Adjacent Land Must Be No More Than 2 Hectares
The CGT main residence exemption can apply to your home and up to 2 hectares of adjacent land (excluding the land under the
house itself).
To give you an idea, 2 hectares is approximately 20,000 square metres – about the size of five acres. While this is rare in urban areas, it
may apply to properties in rural or semi-rural locations.
If your land exceeds this size, only a partial exemption is available. The capital gain must then be calculated on a pro-rata
or valuation basis,
and the ATO offers some flexibility in how this is done.
Land Must Be Used for Private or Domestic Purposes
To qualify for CGT exemption, the adjacent land must be used mainly for private or domestic purposes in connection with the home. This includes:
The key factor is that the land supports private living and is not used for commercial purposes.
What Does “Primarily for Private Use” Mean?
The ATO considers how much time or area was used for private versus non-private purposes.
For example, if you've owned the property for 30 years and ran a small hobby business in a shed for just one year, the land could still be
seen as primarily for private use.
However, if a significant portion of the land was used for business or rental purposes, only a partial CGT exemption will
apply.
Adjacent Land Doesn’t Have to Be Right Next to the House
The land doesn’t need to surround the home directly. Even a nearby vacant lot or separately titled land could qualify –
such as a block across the road – if it’s genuinely used in connection with the home for private purposes.
That said, the further the distance, the less likely it is to meet the “adjacent” test.
Selling the Land Separately? No Exemption
If you sell, gift, or transfer any part of the adjacent land separately (for example, after subdividing it), that land won’t be eligible for CGT exemption. The exemption only applies when your home and all relevant land are sold together as one asset.
This also applies to dual occupancy situations, such as building a second dwelling on the land and selling it separately. The ATO has specific guidelines for how CGT is applied in such cases.
Need Help?
If you’re dealing with any of these situations – especially if you're planning to subdivide or sell part of your land – it’s a good idea to
seek professional advice. This will ensure you understand your CGT obligations and avoid unexpected tax consequences. Contact us today to
discuss.
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