Buying a new home before selling the old one

There are many different issues to be considered, and matters to be juggled, when buying a new home (eg, financing, storage of furniture, etc – and timing, of course).

But a common issue is whether you should sell your existing home first and then buy – or buy first. (Most “experts” say you should sell first.)

But if you are caught in that situation (or choose to be in that situation) where you buy a new home first there is an important tax rule to consider.

And this centres on the capital gains tax (CGT) rule that you can’t have two CGT-free homes going for the same period or at the same time. 

And where you buy a new home before selling the old home you technically have two CGT-exempt homes running at the same time – for which, in principle, you cannot get a full CGT exemption when you later sell one or the other.

However, there is an important CGT concession that can help you in this case – and it is the “changing main residence concession”.

This broadly grants you a six month period in which both homes will be entitled to the full CGT exemption for your home. 

In particular, it allows you to claim a full CGT exemption on your original home provided you sell it within six months of buying the new home – even if you have lived in the new home as your main residence for much of that six month period.

In other words, it allows you a six month overlap period to treat both homes as your CGT-exempt main residence.

However, the practical application of the rules can be complex. For example: 

• What happens if you exceed the six month period? Which home retains the full CGT exemption? And how do you calculate the partial exemption on the other home?
• What if you rent the original home during that six month period? Do you lose the benefit of the concession in this case? 
• And, crucially, does the ATO have a discretion to extend the six month period in extenuating circumstances? (And the answer to this is “no”!)

You may think that this is one of those tax rules that the ATO does not pay a lot of attention to – and you may be right. Nevertheless, it is still the law of the land.