A question that surfaces now and then in regard to capital gains is whether the main residence exemption extends to additional land acquired after the time of acquisition of the residence.

The short answer is yes — provided that certain requirements are met. It should also be noted that where the exemption applies upon satisfaction of the following requirements, it applies to both pre- and post-CGT dwellings (before and after 20 September 1985).

The requirements are:

1. the additional land (including the area of land on which the dwelling is built) is adjacent to that on which the dwelling is situated;
2. the total area of land is not greater than two hectares;
3. the additional land is used primarily for private or domestic purposes in association with the dwelling; and
4. the CGT event that happens in relation to the additional land also happens in relation to the dwelling (that is, your ownership interest in it).

To further explain, the ATO has provided an example.

Tom and Mary purchase a home in 1987 and occupy it as their main residence. The home has never been used for income producing purposes.

In 1989, they purchase the vacant block of land that adjoins the land on which their dwelling is situated and construct a private swimming pool. The total of the area of adjacent land and the area of the land on which the home is situated is less than 2 hectares.

In 2001, they enter into a contract to sell the home with the adjoining block. A full main residence exemption is available.