You bought a place, lived in it for a few years, then life moved you somewhere else. You rented it out. Now you're wondering whether you'll face a capital gains tax bill when you sell. For a lot of Australians in that exact spot, the answer might be no, if the six-year rule applies.
Understanding exactly how that rule works, and where it stops working, is worth your time before you make any decisions.
What the rule actually says
Your main residence is generally exempt from CGT. Usually, a property stops being 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 used it to produce income, such as rent, or indefinitely if you did not use it to produce income.
That indefinite option is worth noting. If you move out but don't rent the property out, the exemption continues indefinitely. The six-year clock only starts ticking once the property begins generating income.
To qualify, the property must have genuinely been your principal place of residence before you rented it out. A property bought and immediately leased to tenants, never lived in, does not qualify.
There is also a one-property rule to keep in mind. During the time you treat the property as your main residence after you stop living in it, you cannot treat any other property as your main residence, except for up to six months if you are moving house.
The six-year clock can reset. Per the ATO's guidance, the six-year limit applies separately to each period of absence after you lived in the property. A first rental period within the limit and a second rental period within the limit can both qualify, provided you moved back in between them.
The ATO sets out the full rules at ato.gov.au.
What can go wrong
Exceeding six years
The "home first used to produce income" rule applies when you exceed the limit. The ATO treats the property as if you acquired it on the day it first became available for rent, at the market value on that date. Your cost base for CGT purposes resets to that figure. Any growth from before that date is effectively sheltered; growth from that point forward is not.
Becoming a foreign resident
If you cease to be an Australian resident and decide to sell your home in Australia after 30 June 2020, you are not entitled to the main residence exemption unless you satisfy certain requirements, so you may be liable to pay CGT. This is one of the more common traps for Australians who move overseas for work. Residency status at the point of sale matters, not just at the point of moving out.
Nominating a second property
If at any point during the rental period you nominate a different property as your main residence, the six-year exemption on the original property ends from that date. You can only hold one main residence at a time.
The CGT discount still matters if the rule doesn't fully apply
Where the exemption only applies for part of your ownership period, the gain on the non-exempt portion is still subject to tax. The good news: there is a CGT discount of 50% for Australian resident individuals who own an asset for 12 months or more, meaning you pay tax on only half the net capital gain on that asset. That discount sits alongside, not instead of, the main residence exemption calculation.
A worked scenario
Say you bought an apartment in Melbourne in 2018 for $650,000 and lived in it as your main residence. In 2021 you took a role interstate and rented it out. You sell it in 2026, five years into the rental period, for $950,000.
- Rental period: five years. Within the six-year limit.
- You did not nominate another property as your main residence during that time.
- You remained an Australian tax resident throughout.
- You did not own a second property as your main residence at any point during that period.
In that scenario, the full capital gain of $300,000 (before costs) would be covered by the main residence exemption. No CGT would apply.
Now change one detail: you sell in 2028, seven years into the rental period. The exemption covers the first six years of the rental period. The remaining portion of the gain is assessable. The ATO would deem your cost base to reset to market value on the day you first rented it out in 2021, and the gain from that point forward (split across exempt and non-exempt years) would need to be calculated with your accountant. The 50% CGT discount would apply to the non-exempt portion if you have held the property for more than 12 months in total.
These are illustrative numbers only. The actual calculation is sensitive to holding periods, costs, and your tax position in the year of sale. A registered tax agent or accountant should run the actual figures.
What to check before you act
Confirm your residency status. If there is any chance you have become a foreign resident for tax purposes during the rental period, get specific advice before signing a contract. The rules for foreign residents differ significantly from those for Australian tax residents, per the ATO.
Get a market valuation dated to the right point. If you first rented the property after 20 August 1996, the law may treat you as having acquired it at market value at that first income-producing time. This can reset the property's market starting point for later CGT calculations. The interaction with the absence rule is technical. Where a professional market valuation is needed, it should be prepared retrospectively as at the relevant date, not guessed years later.
Talk to the right people before you list. A registered tax agent or accountant familiar with CGT and property can map out your specific dates and tell you exactly which periods are exempt and which are not. A buyer's agent or property specialist can help you think through your broader property position, including whether holding, selling, or converting to a long-term investment property suits your circumstances. You can also speak with the EWC team if you want to understand how this intersects with your investment property plans.
General information only, not personal financial advice. Speak with a licensed adviser before acting.