The main residence exemption only applies to land with a residence on it – a hint is in the phrase ‘main residence’!. If you were to demolish the house and sell the land you could be in for a nasty surprise as there would likely be CGT applicable. GST might be an issue also. Example Homer purchased a main residence in 2010 for $1mil. It was dilapidated when he bought it and it has only become more run down since. Luckily the land value alone is now worth $2mil and Homer is negotiating with a developer. They agree on $2mil on the condition that Homer remove the house. Homer knocks the house down and stays in a 5 star hotel with a butler service for the full 42 day settlement period. It will cost him about $40,000 but, heck, he has earned it and deserves it for making a $1mil tax free capital gain. Later Homer does his tax return and finds out that the main residence exemption cannot apply! No problem says Homer, the value didn’t increase much by him knocking the house down. However, Homer is shocked for a second time because the cost base of the property will be, basically, the purchase price plus costs such as stamp duty and a few other fees and charges and the demolition cost. Perhaps $1.1mil in this case. This could mean a capital gain of about $900,000. That would be about $450,000 additional income for Homer, how as head scientist at Lucas Heights is already on the top tax rate which means he has made a mistake of about $211,500 plus the $40,000 for the hotel! Had Homer sought advice there may have been a way to structure this so that the main residence exemption remained, and the demolition occurred. Strategies to keep the exemption may be to pay for the demolition after settlement, or to give the developer possession before settlement or just reduce the price by the cost of demolition.