Many people buy a holiday home when the kids are young but as time goes by, they find they’re using it less and less. Recent changes to property taxes in Victoria have had some property holders questioning whether to maintain a holiday home. With the potential for other states to also play with property taxes, it is timely to consider the implications and opportunities individuals may have if they are looking to sell their holiday home.
Capital gains tax
The first thing to consider is capital gains tax (CGT). CGT generally applies to properties acquired on or after 20 September 1985 unless the property is eligible for a full or partial main residence exemption.
Usually, a property ceases to be your main residence when you stop living in it. However, for CGT purposes, you can continue treating a property as your main residence for up to six years if you rent it out, or indefinitely if you didn't use it to produce income. A 50% CGT discount is also available for eligible taxpayers if the property has been owned for more than 12 months prior to sale. Importantly, you can’t treat two properties simultaneously as your main residence.
If you are a foreign resident when you sell your holiday home, you may not enjoy the same CGT concessions. Generally, foreign residents are not entitled to the main residence exemption for property sold after 30 June 2020 unless they satisfy the life events test. Foreign residents may also not be entitled to the 50% CGT discount on assets acquired after 8 May 2012, with any discount apportioned based on their period of Australian residency.
Strategies to consider if CGT applies
Individuals who are not eligible for a CGT exemption on the sale of their holiday home can end up with a hefty tax bill if the property value has significantly increased.
In these cases, considerations may include the timing of the sale, and options to help reduce assessable income.
Some people delay selling their holiday home until after they retire when their assessable income is lower and the capital gain is taxed at a lower marginal rate, but that may not work for everyone.
Another potential strategy, if eligible, is to make a personal deductible contribution (PDC) to super using a portion of the sale proceeds, which could assist with reducing assessable income. This could be particularly attractive if the person isn’t working and has the full concessional contribution cap of $30,000 to use and isn’t subject to Division 293 tax.
Importantly, from age 67 to 74, individuals must meet the work test (gainfully employed for at least 40 hours in a 30-day period during the financial year) or work test exemption (have a total super balance of less than $300,000, having met the work test in the previous financial year) to be able to claim a deduction on a personal contribution.
Those with less than $500,000 in super at the end of the previous financial year, can increase their concessional cap even further by using any unused concessional cap from the past five years.
Example
Rose, age 62, sold her holiday home in February 2025. She is not eligible for a CGT main residence exemption. She received net sale proceeds of $800,000 and has an assessable capital gain of $150,000 after the 50% discount. Let’s assume her only other taxable income received in the 2024-25 financial year is $10,000 of investment income.
Rose retired a year ago and on 30 June 2024 had a Total Super Balance of $420,000. Her MyGov statements show her unused concessional cap from the past 5 years is $60,000, plus the full 2024-25 cap of $30,000. She could use $90,000 of the sale proceeds to make a PDC and reduce her assessable income in the 2024-25 financial year as follows:
- Assessable income $160,000
- less PDC ($90,000)
- Net assessable income $70,000
For completeness, Rose’s superannuation fund will deduct 15% contributions tax on the $90,000 that she makes as a PDC.
Contributing the proceeds of a property sale to super
For those close to or in retirement, it can be beneficial to use sale proceeds from a holiday home to boost super, leading to a higher nest egg from which to draw a tax-free retirement income.
Individuals aged under 75 with less than $1.66 million in super on 30 June 2024 could potentially make an after-tax or non-concessional contribution (NCC) of up to $360,000 in the 2024-25 financial year. There is no requirement to meet the work test.
Example
Returning to our previous example, Rose has less than $1.66 million in super and has not made any NCCs over the annual cap in the past 3 years. She could therefore use $360,000 to make a NCC into her super in addition to the personal deductible contribution. Depending on the timing, she could look to make a NCC of $120,000 before 30 June 2025 and trigger the bring forward in 2025-26, thus getting a higher amount into super.
Another potential avenue to contributing more to super is via a downsizer contribution if the person meets all the eligibility criteria. Individuals aged 55 and older can potentially contribute up to $300,000 from the sale proceeds of their property into super. Importantly, they must have owned the property for at least 10 years and the sale proceeds must be eligible for at least a partial CGT main residence exemption (or would be entitled to the exemption if it was a CGT rather than a pre-CGT asset, acquired before 20 September 1985). Note a person’s total super balance is irrelevant when determining eligibility to make a downsizer contribution and they can only use the downsizer contribution once.
Note that contributing to super may not be the best solution for everyone. Individuals with surplus proceeds from the sale of a holiday home may also want to explore non superannuation investment opportunities. This is pertinent for those who are ineligible to contribute to super or are perhaps several years away from retirement and need access to their money. A financial adviser can assist in guiding with these decisions.
Get the right advice
Selling a holiday home can have tax implications, which are best discussed with a lawyer or accountant. There may be opportunities to utilise the proceeds to boost your retirement nest egg within or outside super. However, everybody's circumstances are different and warrant speaking to a financial adviser early about the appropriate options.
Brooke Logan is a technical and strategy lead in UniSuper's advice team. UniSuper is a sponsor of Firstlinks. Please note that past performance isn’t an indicator of future performance. The information in this article is of a general nature and may include general advice. It doesn’t take into account your personal financial situation, needs or objectives. Before making any investment decision, you should consider your circumstances, the PDS and TMD relevant to you, and whether to consult a qualified financial adviser.
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