Australia's main residence CGT exemption: the 6-year and 6-month rules

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Kooky

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Most Australians who sell the home they live in pay no capital gains tax on it. That is the main residence exemption, and it is the reason a vendor's first question to an agent is rarely about tax. The questions start when life has been less tidy than the rule: the owner moved out and let the place for a few years, bought the next home before the old one sold, took in a lodger, or ran a practice from the front rooms. Each of those has its own rule, its own time limit and its own arithmetic.

This guide follows the Australian Taxation Office (ATO), whose pages on the main residence were last updated in June 2026. It covers the full exemption, the six-month overlap between two homes, the six-year rule for a rented former home, the partial exemption when part of a home earns income, and the capital gains tax changes scheduled for 1 July 2027. Capital gains tax (CGT) is a federal tax, so the rules below are the same in every state and territory. They are general rules; the ATO's pages say plainly that the outcome depends on each owner's dates and use of the property.

Limits stated on the ATO's main residence pages, last updated in June 2026.

What the full exemption requires

According to the ATO, an Australian resident's home is exempt from CGT when three things are true at once. The dwelling was the home of the owner, their partner and other dependants for the whole period it was owned. It was not used to produce income. And it stands on land of 2 hectares or less.

When all three are met, the ATO says there is no tax on a capital gain, and the other side of that coin applies too: a capital loss on the home is ignored. An owner cannot use a loss on an exempt home against other gains.

The ATO gives three examples of income use that break the full exemption: running a business from the home, renting it out, and "flipping" it, which the ATO describes as buying a property to renovate it and sell it at a profit. A home that fails one of the conditions is not simply taxed in full. A partial exemption may be available, and the ATO points owners to its CGT property exemption tool to work it out. Most of this guide is about that middle ground.

Where a home sits on more than 2 hectares, the ATO says the owner chooses which part of the property is exempt. The rest of the land is outside the exemption.

What counts as a home

Two definitions do the work here, and the ATO keeps them apart.

The first is the dwelling. The ATO defines it as anything used wholly or mainly for residential accommodation, and lists a house or cottage, an apartment or flat, a strata title unit, a unit in a retirement village, and a caravan, houseboat or other mobile home. The property must have a dwelling on it that the owner has lived in: a vacant block does not qualify. For a flat or home unit, the exemption can extend to a garage, storeroom or other structure associated with it, provided that structure is used mainly for private purposes and is sold together with the unit.

The second is whether the dwelling is the owner's main residence. No single test settles it. The ATO lists indicators: the owner and their family live in it, their personal belongings are kept there, their mail is delivered there, it is their address on the electoral roll, and services such as gas and power are connected. The length of time the owner has lived there and their intention in occupying it may also be relevant, the ATO adds.

When the exemption starts

The ATO says a home qualifies from the time it is acquired, provided the owner moves in "as soon as practicable". For a purchase, the acquisition time for this purpose is the settlement date of the contract.

Two situations test that phrase. If moving in is delayed by illness or another unforeseen circumstance, the home stays exempt as long as the owner moves in once the cause of the delay is removed. The ATO's example is a buyer whose employer sent her overseas for 4 months just before settlement: because the assignment was unforeseen and she moved in on her return, she can treat the townhouse as her main residence from the date she acquired it.

The second situation goes the other way. If the property is rented to someone, so that the owner cannot move in, it does not become the main residence until the owner does move in.

The six-month overlap between two homes

Buying before selling is common, and the ATO allows for it. A person who acquires a new home before disposing of the old one can treat both as their main residence for up to 6 months. The ATO sets three conditions, and all three must be met:

• the old home was the person's main residence for a continuous period of at least 3 months in the 12 months before it was disposed of;
• the old home was not used to produce income, such as rent, in any part of those 12 months when it was not the main residence;
• the new property becomes the person's main residence.

The simple case in the ATO's examples is a couple whose purchase settled in January and whose sale settled in April. Both homes are treated as their main residence from January to April, even though they no longer lived in the old one.

When the sale drags on, the rule is narrower than many owners expect. The ATO says both homes are exempt only for the last 6 months before the old home is disposed of. For the earlier part of the overlap the owner chooses which of the two is the main residence, and the other is subject to CGT for that period.

The ATO works this through with a couple who moved into their old home at settlement on 1 January 2002, settled on the new one on 1 January 2025, and settled the sale of the old one on 1 October 2025, after 8,675 days of ownership. Both homes are covered from 1 April 2025 to 1 October 2025. The 90 days from 1 January 2025 to 31 March 2025 are covered for one home only. If the couple choose the new home, a fraction of 90 ÷ 8,675 of the gain on the old home is assessable, a little over 1 per cent. If they choose the old home instead, its sale is fully exempt, and the ATO notes that the same 90 days then become assessable if the new home is later sold.

Moving out: the six-year rule

A property usually stops being a main residence when the owner stops living in it. The ATO's point is that the owner can choose to keep treating it as one, and the consequences depend on what the property is used for afterwards.

If the former home is not used to produce income, the ATO says it can be treated as the main residence for an unlimited period.

If the former home is used to produce income, such as rent, it can be treated as the main residence for up to 6 years after the owner stops living in it. This is what the trade calls the six-year rule. Three limits come with it. The property must have been the owner's main residence first: the exemption does not cover any period before that, for example where it was rented out before the owner ever lived in it. While the former home is treated as the main residence, no other property can be, except for up to 6 months when moving house. And if part of the home was already used for income before the owner moved out, the exemption does not apply to that part.

The 6 years are not a single lifetime allowance. The ATO applies the limit to each period of absence, and a period of absence ends when the owner stops renting the home and either moves back in or leaves it vacant. Two of its examples show what that means:

• An owner moved out in 2014 and signed a contract to sell in 2025. Over the 10 years in between she rented the house for 3 years, left it vacant for 2, rented it for 3 more and left it vacant for 2 more. The rented periods add up to 6 years and the vacant ones do not count against the limit, so the whole 10 years is covered and the gain is disregarded.
• Another owner moved out in 2014, rented the house for 5 years, moved back in 2019 for 2 years, then rented it for 4 more years before signing a contract to sell in 2025. Each rental period is under 6 years and has its own limit, so both are covered.

The choice is also flexible in the other direction. The ATO says an owner can choose when to end the period covered: after renting for 5 years, the home could be treated as the main residence for only 3 of them.

When the six-year limit is exceeded

Once income use runs past 6 years in a single absence, CGT applies to the period after the limit. The ATO sets the cost base at the market value of the home when it was first used to produce income, plus allowable costs since then. The gain is then shared between exempt and non-exempt days.

The ATO's example is an owner who bought an apartment for A$180,000, lived in it, then moved interstate on 29 September 1999 and rented it out, when it was worth A$220,000. It was sold for A$555,000 under a contract that settled on 29 September 2024, with A$15,000 of agent's and solicitor's fees. The six exempt years ran from 29 September 1999 to 29 September 2005.

The original purchase price of A$180,000 plays no part. Of the 9,133 days from first rental to sale, 6,940 fall after the six years, about 76 per cent. The ATO then applies the 50 per cent CGT discount, and the owner reports a net capital gain of A$121,581 in her 2025 return.

Earning income from part of the home

The ATO says that renting out part of a home, or running a business from it, generally means only a partial exemption: the part used to earn assessable income is subject to CGT. This includes renting through the sharing economy. The gain depends on three things, the ATO says: the proportion of the floor area used for income, the period it was used that way, and whether the home was first used for income after 20 August 1996.

To decide whether CGT applies at all, the ATO uses what it calls the interest deductibility test. The owner asks whether they would be allowed a deduction for interest had they borrowed to acquire the home, whether or not they actually borrowed. CGT applies to the same extent. The test cannot be gamed from either side: according to the ATO, an owner with a home loan cannot reduce the gain by choosing not to claim interest, and cannot add the unclaimed interest to the cost base. The exemption stays whole, however, where someone else uses part of the home to earn income and the owner receives no assessable income from them.

The ATO's worked example is a house bought on 1 July 2003 for A$300,000 and sold on 30 June 2026 for A$700,000, the owner's main residence throughout. A tenant rented one bedroom, 20 per cent of the floor area, and shared the living room, bathroom, laundry and kitchen, another 30 per cent. The deductible share is 20 per cent plus half of the 30 per cent, which is 35 per cent. The gain of A$400,000 is multiplied by 35 per cent to give A$140,000, with no apportionment by days because the letting ran until the sale, and the 50 per cent discount brings it to A$70,000.

Running a business is treated the same way, but working at the kitchen table does not put a home into the CGT net. The ATO says running a business from home means the home is the principal place of business, with space set aside for it. Occasional work from home, or working there by preference, does not count, and nor does a home study used for work normally done at the workplace.

The link to the exemption is again the interest deduction. An owner keeps the full exemption only if no interest deduction could be claimed. A partial deduction is available, the ATO says, where part of the home is set aside exclusively for the business, is clearly identifiable and is not readily adaptable for private use; its example is a doctor's surgery in a doctor's home. Paid child-minding at home gives no interest deduction unless part of the home is exclusively set aside for it.

The market value rule and the six-step sum

Behind several of these examples is one rule the ATO calls "home first used to produce income". Where it applies, the owner is taken to have acquired the home at its market value on the day it was first used for income. A market valuation at that date is needed, and a sale within 12 months of it cannot use the CGT discount.

The ATO says the rule applies when the property was acquired on or after 20 September 1985, was first used for income after 20 August 1996, gets only a partial exemption on sale because of that income use, and would have been fully exempt immediately before the income use began. It does not apply where the home was used for income from the time it was acquired, where an inherited main residence is sold within 2 years, where the owner chooses to keep treating the property as the main residence after moving out and it is fully exempt, or where the owner does not qualify for a partial exemption at all.

For a home partly used for income, the ATO sets out six steps:

1. Work out the gain or loss, using the home's value when it was first used to produce income.
2. Work out the proportion of the floor area set aside for income.
3. Multiply the first by the second. If the income use lasted until the sale, this is the assessable gain.
4. Otherwise, count the days the home was used for income.
5. Count the days from the first income use to the sale.
6. Multiply the step 3 figure by the step 4 days divided by the step 5 days.

The ATO's example of all six steps is a home bought in December 1997 for A$200,000. From 1 November 2018, when it was worth A$520,000, the owner used 40 per cent of it for a consultancy. The practice moved out on 1 August 2022 and the home was sold on 1 May 2026 for A$620,000. The gain is measured from the 2018 value: A$100,000. The business share is 40 per cent, or A$40,000. The business ran for 1,370 of the 2,739 days from first income use to sale, so A$40,000 × 1,370 ÷ 2,739 gives A$20,007, and A$10,003 after the 50 per cent discount. The A$320,000 of growth before 2018 is not in the sum.

The 12-month point is shown by a home bought on 25 July 2014 for A$450,000 and first rented on 2 August 2025, when it was worth A$650,000. It was sold on 10 June 2026 for A$696,000. The gain is A$46,000, and because the deemed acquisition was less than 12 months before the sale, the ATO allows no CGT discount on it.

A rental that later becomes the home

The opposite sequence, tenant first and owner second, uses a different base. Because the property was used for income from the day it was acquired, the market value rule does not apply and the cost base is what the owner paid. The ATO's formula is the gain multiplied by the days used to produce income, divided by the total days owned. It counts those days from contract dates, not settlement dates.

In the first case the house was rented from 1 October 2013 to 30 June 2016, the owner moved in on 1 July 2016 and sold on 30 March 2026; the 3,560 days he lived there are exempt. In the second, the contract to buy was signed on 21 October 2019, the owner moved in on 16 November 2021 and the contract to sell was signed on 1 April 2026. Nothing the owner does later brings the early rental period inside the exemption.

Reporting, the choice and residency

None of the choices described here is lodged when the owner moves out. The ATO says the choice to keep treating a former home as the main residence is made in the tax return for the income year in which the sale contract is signed. Until then, the owner needs the records that will support it: the dates of moving in and out, the dates of each tenancy, and the valuation at first income use where the market value rule applies.

Residency is a separate gate. The ATO says a person who was not an Australian tax resident while living in the property is unlikely to qualify, and that a foreign resident at the time of the CGT event, such as a sale, generally cannot claim the main residence exemption on Australian residential property. The ATO keeps the detail on a separate page about foreign residents, which was not read for this guide, so the exceptions to that general statement are not set out here.

What is scheduled for 1 July 2027

Every example above ends with the 50 per cent CGT discount, and that discount has an end date. According to the ATO's page on the reform, last updated on 29 June 2026, from 1 July 2027 the 50 per cent discount for individuals, trusts and partnerships is replaced by cost base indexation and a 30 per cent minimum tax rate on capital gains. The ATO says the measures were announced in the 2026-27 Budget on 12 May 2026 and are now law, under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 and the Income Tax Rates Amendment (Tax Reform No. 1) Act 2026. The same page says negative gearing for residential property investments is limited to new builds from 1 July 2027, with properties held at the time of the announcement, 7:30pm AEST on 12 May 2026, exempt from that change.

On existing holdings, the ATO states that the CGT changes apply only to gains that accrue after 1 July 2027 and that the impact on existing investments will be limited.

That is where the ATO's published explanation stops, and several questions that bear directly on this guide are open:

• The reform page does not mention the main residence or the family home. No ATO page read for this guide says the exemption itself changes; equally, none confirms that it does not.
• The ATO's main residence pages, last updated in June 2026, still calculate every partial exemption with the 50 per cent discount. They do not show how the assessable part of a gain on a former or partly rented home will be worked out once indexation and the 30 per cent minimum rate apply.
• The reform page does not explain how a gain is split between the period before and the period after 1 July 2027, how cost base indexation is computed, or how the minimum rate is applied.
• It gives no definition of a "new build" and no worked example.

Kooky, from Shaka

Kooky edits Agents Estate and builds Shaka, the payment router he made for real estate professionals. One payment comes in, and every agent, agency and party in the deal receives their signed share on closing date.

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