Generally the main residence exemption applies from the date a completed dwelling becomes the taxpayer’s main residence i.e. from the date they actually move into the residence.
Under the ‘four year construction rule’ a taxpayer can choose to treat the completed dwelling (and the land) as if it were their main residence for a period of up to four years before it actually becomes the taxpayer’s main residence. This allows a taxpayer to apply the main residence exemption for up to a four year period during which the block was purchased and the dwelling was being constructed, repaired, or renovated.
This means that if land is acquired, a dwelling constructed, and the taxpayer moves into the residence within 4 years of the land being acquired, then the main residence exemption applies for that whole period. For this to apply, from the date the land was purchased the taxpayer cannot claim the main residence exemption on another property. So a taxpayer living in another main residence during the construction period of the new main residence will be subject to capital gains tax on sale of the ‘old’ main residence.
In addition, to apply the four year construction rule the following two conditions must be satisfied:
• The dwelling must become the taxpayer’s main residence as soon as practical after construction is completed, i.e. the taxpayer must actually move into the property.
• The dwelling must remain the taxpayer’s main residence for at least three months.