Capital gains tax on land.
The rules surrounding when a home will be fully exempt from Capital Gains Tax (CGT) are extensive — and often complex.
One particularly important rule is that the exemption only applies to the home and adjacent land to the extent that the land was used primarily for private or domestic purposes in association with the dwelling.
Key things to know about the adjacent land requirement
1. Size matters — Two hectares max
The exemption only applies where the adjacent land is no greater than two hectares, excluding the land directly under the home.
Two hectares is roughly equivalent to the traditional five-acre block — a sizeable area of 20,000 square metres (e.g., 200 metres by 100 metres). Take a walk around your neighbourhood, and you’ll see just how big that is.
Few homes in major metropolitan areas will approach this block size. However, this can be a relevant issue for semi-rural or rural residential properties.
If the adjacent land exceeds two hectares, then a full CGT exemption is not available. Instead, the gain is calculated on a partial basis, using a pro-rata or valuation method. Fortunately, the ATO is reasonably generous in how this can be worked out.
2. The land must be used primarily for private or domestic purposes
This means that the adjacent land must be used in connection with your home life — not for business or commercial use. Examples of acceptable private/domestic use include:
- A granny flat where a child, relative, or other person lives rent-free or pays only outgoings
- A shed, cabana, tennis court, or pool, provided the use is private and domestic
- Garden areas or open space used by the household
However, the key word is “primarily”. The ATO guidance explains that this requires a judgement based on time and/or area. For example:
If the land was owned for 30 years and used for private purposes the whole time — except for one year where a small commercial activity was carried out in a shed — it’s still likely that the land was used “primarily” for private or domestic purposes.
If the land was not primarily used for private or domestic purposes, then only a partial CGT exemption will apply to that portion.
3. The land doesn’t have to be directly next to the home
“Adjacent land” does not necessarily mean land that physically touches the home block.
It can include:
- Vacant land on a separate title next door
- Land across the road from your home
- Land with other buildings on it
The key is whether the land was still used primarily in connection with the main residence.
However, the further away the land is from your main residence, the less likely it is to qualify as “adjacent” for CGT exemption purposes.
4. Selling adjacent land separately disqualifies the exemption
If you sell, gift, or transfer any portion of adjacent land separately from the main home and remaining land (such as after subdivision), then no main residence CGT exemption is available for that portion.
Why? Because the CGT exemption applies only when the home and adjacent land are sold as a whole. Selling part of it separately breaks that condition.
This issue also arises in dual occupancy arrangements, where a new dwelling is constructed and sold separately from the original home. The ATO has detailed guidelines about how CGT rules apply in those circumstances.
More information
Contact us for advice on CGT exemptions on land
The rules regarding CGT exemptions on adjacent land are highly nuanced and fact-dependent.
If any of these scenarios apply to your situation — or if you’re planning a subdivision, sale, or transfer — it’s wise to seek professional advice. Even if it’s just for peace of mind, we’re here to help you navigate the complexities.
Based in Noosa, on the Sunshine Coast Queensland, we work with clients throughout Australia.