Capital Gains Tax principle place of residence exemption

by Arthur Kassos, CPA

Recently I have had a couple of Capital Gain Tax (CGT) questions sent to me asking similar questions in respect to the principle place of residence exemption.’

A couple has purchased a block of land in 1994 to build a home for themselves. They eventually build a house on the vacant land nearly six years later and live in it for a period of six years before purchasing another property to live in. It took them five months after the purchase of the new house to sell their original house.

The CGT consequences of the above example are as follows. Ordinarily the sale of their home would be tax free but unfortunately before it was a home it was a vacant block of land for six years.

However the law states that a main residence exemption can be claimed for the vacant land if the land was owned by the couple for the SHORTER of either:
a)four years before the home became the couple’s main residence, or
b)from the time the couple purchased the land and ending when the house became their main residence.

The CGT exemption will only partially apply to the above circumstances as the land was vacant for more then four years before the residence was built on it (six years vacant).

The other part of the above CGT example was that a new home was purchased and the couple owned two main residences for five months before their original home was sold. A couple can only claim one principal place of residence exemption between them. As the sale of the old home was within six months they are entitled to own two main residences for up to a maximum period of six month between the purchase of the new home and the sale of the old, whichever period is shorter.