The 6-year rule for capital gains tax (CGT) on property in Australia

If you've moved out of your home and started renting it out, you may still qualify for a valuable capital gains tax concession. Under the Australian Taxation Office's main residence exemption 6-year rule, many property owners can continue to treat their former home as their main residence for CGT purposes for up to 6 years.

In this guide, we'll explain how the 6-year rule CGT works, when it applies, common mistakes to avoid, and practical strategies that may help reduce your tax bill when you sell.

Capital gains tax (CGT) can significantly reduce the profit you keep when selling a property. However, the Australian Taxation Office (ATO) allows certain exemptions that may reduce or eliminate the tax you pay.

One of the most valuable strategies is the six-year rule for capital gains tax, which forms part of the main residence exemption. This rule allows homeowners to move out of their property, rent it out, and still treat it as their main residence for CGT purposes for a limited period. When applied correctly, the rule can reduce capital gains tax on property rented out, particularly when a property increases in value over time.

At Liston Newton, our tax advisors work with business owners and property investors to structure their finances to legally reduce CGT and support long-term wealth planning. In this guide, we explain how the main residence exemption and the six-year rule work, when the ATO allows you to treat a property as your main residence, and what this means for your capital gains tax obligations when selling property.

To help clarify the concept, watch the short video below where our team explains how the 6-year rule works and how it can affect capital gains tax on property.

The capital gains tax 6-year rule allows a property that was previously your main residence to continue receiving a temporary CGT exemption after you move out.

Under Australian Taxation Office (ATO) rules, this provision falls under the main residence exemption and is often referred to as the absence rule. It allows homeowners to move out of their property and still treat it as their main residence for capital gains tax purposes for a limited time.

If the property is rented out, the exemption can generally apply for up to six years under the ATO’s absence rule for treating a former home as a main residence. During this period, you may not have to pay capital gains tax on the property if a CGT event occurs, such as when the property is sold.

If you move back into the property and re-establish it as your main residence, the six-year period can reset, allowing the exemption to apply again in the future.

Because the rule interacts with the ATO’s absence rule and CGT reporting requirements, it is important to understand how the exemption applies before selling or renting out a property.

To claim the main residence exemption, the Australian Taxation Office (ATO) must recognise the property as your principal place of residence (PPOR) based on the ATO eligibility criteria for the main residence exemption. This determination affects whether the property may qualify for a capital gains tax (CGT) exemption, which can reduce your tax liability when a property is sold.

The ATO does not rely on a single test to determine whether a property is your main residence. Instead, it considers several indicators to assess whether the property genuinely functions as your principal place of residence during that time.

Common factors the ATO reviews include:

• You and your family live in the property and keep personal belongings there
• The property is used as your primary residential mailing address
• You are registered on the electoral roll at that address
• Utilities such as electricity, gas or internet are connected in your name

These factors help the ATO determine whether the property was your main residence during that time, which affects whether a future sale may be exempt from CGT or reduce the net capital gain reported in your annual income tax return.

You also generally cannot treat another property as your main residence at the same time, unless specific exceptions apply under Australian tax rules.

If the circumstances are unclear, professional advice can help ensure the property qualifies for the main residence exemption and that any capital gain is reported correctly for income tax purposes.

Here's a simple example of how the 6-year rule CGT can work in practice. Every situation is different, but this scenario shows how the main residence exemption may reduce your capital gains tax when selling a former home.

The challenge

Sarah purchased a home for $650,000 and lived in it for several years before relocating for work. Rather than selling, she decided to rent the property while living elsewhere. Six years later, the property's value had increased significantly, and she wanted to know whether she'd face a large CGT bill when she sold.

The solution

Because Sarah had established the property as her main residence before moving out and sold it within the six-year exemption period, she was able to apply the main residence exemption under the 6-year rule.

The experience

Sarah sold the property for $1,050,000, creating a capital gain of $400,000. As she met the ATO's eligibility requirements and hadn't nominated another property as her main residence, the gain remained exempt from CGT.

The highlights

• Purchase price: $650,000
• Sale price: $1,050,000
• Capital gain: $400,000
• Rental period: Less than six years
• Main residence exemption applied
• Estimated CGT payable: $0* (subject to individual circumstances)

The outcome

By understanding how the 6-year rule for CGT applied before selling, Sarah was able to retain the full value of her capital gain rather than pay unnecessary capital gains tax. Planning ahead helped her make a more informed financial decision.

The 6-year rule does not apply in every situation. Certain circumstances can limit or prevent the exemption from applying.

Common situations where the rule may not apply include:

• The property was never established as your main residence before it was rented
• The property has been rented for more than six years without you moving back in
• You nominate another property as your main residence during the same period
• The property was mainly used to produce income from the beginning

If any of these situations occur, part or all of the profit from selling the property may be subject to capital gains tax.

This means a portion of the gain may be included in your net capital gain and reported in your annual income tax return. The outcome can affect your capital gains tax liability, depending on how long the property generated rental income and how much its value increased.

Because these rules interact with broader Australian tax rules, it is important to understand whether the property still qualifies for the exemption before you sell.

Renting out your entire home and renting out only part of it don't always have the same CGT outcome. If you earn income from just one room or short-term accommodation such as Airbnb, you may still qualify for the main residence exemption, but only a partial exemption may apply to the part of the property used to generate income.

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If you rent out part of your home or use it for short-term accommodation, keep accurate records of when the property generates income and which areas were used. This can help calculate any capital gains tax correctly when the property is sold.

If the six-year rule does not fully apply, you may still need to calculate the taxable portion of the gain when the property is sold.

Capital gains tax is generally calculated by comparing the capital proceeds from the sale of the property with its cost base. The capital proceeds are the amount you receive when the property is sold, while the cost base includes the purchase price and certain costs associated with acquiring and holding the property.

A simple way to calculate the gain is:

1. Work out the capital proceeds from selling the property.
2. Subtract the property’s cost base to determine the capital gain.
3. Identify the period during which the property qualified as your main residence.
4. Determine how long the property was producing rental income outside the six-year exemption period.
5. Apportion the gain to calculate the amount that may be subject to capital gains tax.

For example, if you owned the property for more than 12 months and part of that time falls outside the exemption period, a portion of the gain may still be subject to capital gains tax. However, the remaining gain may qualify for the CGT discount.

The taxable portion of the gain becomes part of your net capital gain and is reported in your annual income tax return. Ensuring the gain is reported correctly is an important part of maintaining proper tax compliance.

Many property owners use a capital gains tax calculator to estimate the outcome before selling. This can help you understand whether the exemption may reduce or even eliminate CGT, or whether you may still need to pay capital gains tax on part of the profit.

The six-year CGT exemption rule only allows you to treat one property as your main residence at a time for capital gains tax purposes. This means you generally cannot apply the 6-year capital gains tax exemption to two properties simultaneously.

If you move out of your home and begin renting it out, the rule may allow you to continue treating that property as your main residence for tax purposes even while it produces income. During that period, you cannot nominate another property as your main residence unless you choose to stop claiming the exemption on the first property.

In practice, this means you must decide which one property will receive the capital gains tax exemption. If you nominate a new home as your main residence, the previous property may become subject to CGT when it is eventually sold.

The rule can still be valuable because it may allow you to treat a property as your place of residence for CGT for up to six years after you move out. This can provide significant CGT savings when you later sell your property.

However, it is important to consider the CGT implications before choosing which property to nominate as your main residence. The way the property is owned and structured can also influence the tax outcome. Selecting the right structure can affect whether you pay tax on any profit or whether the gain remains exempt from capital gains tax.

The 6-year primary residence exemption rule generally applies to Australian taxpayers who qualify for the main residence exemption. However, the rules are different if you become a foreign resident for tax purposes.

Under current Australian tax law, many individuals classified as foreign residents may lose access to the capital gains tax exemption on their former home. This means that when they sell their property, the gain may become subject to CGT, even if the property previously qualified as their main residence.

In these circumstances, the property may no longer be exempt from capital gains tax, and the owner may need to pay tax on any profit when the property is sold.

Because the rules can change depending on residency status, ownership history, and how long the property was used as a home, it is important to consider the CGT implications carefully before relying on the 6-year CGT exemption rule.

Professional advice from experienced property tax specialists can help determine whether the property is still eligible for the exemption and whether the rule can reduce your capital gains tax when you sell.

The 6-year capital gains tax exemption can be a useful way to reduce or avoid CGT when a former home is rented out. However, several conditions must be met for the rule to apply.

Key facts to understand include:

• The property must first qualify as your main residence for tax purposes.
• You can only treat one property as your main residence at a time.
• The rule allows you to continue treating a property as your main residence for tax purposes even if it is rented out, for up to six years.
• If you move back into the property and again use it as your home, the rule resets and a new six-year period may begin.
• If the property is rented out for more than 6 years without you moving back in, part of the gain may become subject to CGT.
• If you owned the property for more than 12 months, you may still be able to claim a CGT discount if you’re still eligible.
• The rule can significantly reduce your capital gains tax liability, but it is important to consider the CGT implications before you sell your property.

When used correctly, the six-year CGT exemption rule can be a valuable strategy to reduce your capital gains tax and improve long-term CGT savings when selling property.

The six-year rule can reduce capital gains tax when selling a former home, but it is not the only concession available. Depending on your circumstances, other exemptions may also reduce your capital gains tax liability.

• Main residence exemption: If the property was your main residence for the entire ownership period, the gain may be exempt from capital gains tax when you sell your property.
• Partial exemption: If the property was your home for part of the ownership period but later became an investment property, only part of the gain may be subject to CGT.
• 50% CGT discount: If you owned the property for more than 12 months, individuals may be able to apply the 50% CGT discount to reduce the taxable gain.
• Six-month overlap rule: When moving between homes, the six-month overlap rule may allow two properties to be treated as your main residence for a short transition period.
• Pre-CGT asset exemption: Properties acquired before 20 September 1985 are generally exempt from capital gains tax under Australian tax rules.
• Superannuation property ownership: If a property is owned through a self-managed super fund, the capital gain may receive concessional tax treatment and may be exempt from CGT in pension phase.
• Increasing your cost base: Certain purchase, ownership, improvement, and selling costs can be included in the property’s cost base, thereby reducing the taxable capital gain when the property is sold.

Understanding how the six-year rule applies can make a significant difference to the amount of tax you pay when completing a property sale. Small differences in how the property was used, how long it was rented, and how it was treated for tax purposes can affect whether the gain is exempt from capital gains tax or whether part of it becomes subject to CGT.

Getting the right CGT advice before selling property can help you understand how the main residence exemption, the six-year rule and other concessions may apply to your situation. Strategic tax minimisation planning can ensure the correct exemptions are applied and that you do not pay more capital gains tax than necessary.

At Liston Newton, our advisory team works with business owners and property investors to review ownership timelines, rental periods, and tax reporting requirements before a property sale. This helps identify opportunities to reduce capital gains tax and ensure the correct exemptions are applied.

If you are planning a property sale and want to understand how the six-year rule may apply to your circumstances, professional CGT advice can help ensure the outcome is structured as effectively as possible.

Do I need to report the sale if I don't pay CGT?

Yes. Even if the main residence exemption means no capital gains tax is payable, you may still need to report the sale on your tax return. The ATO uses this information to confirm your eligibility and ensure the correct exemption has been applied.

Does the 6-year rule apply to Airbnb properties?

It can. If your former home is rented through Airbnb or another short-term platform, the property may still qualify for the 6-year rule CGT. However, how the property is used can affect your eligibility, so it's worth seeking advice before selling.

Can I claim the 6-year rule if my property is owned by a trust?

Generally, no. The main residence exemption is usually available to individuals, not properties owned by trusts or companies. Different tax rules may apply depending on the ownership structure.

What records should I keep for CGT purposes?

Keep records of your purchase contract, settlement statement, renovation costs, rental periods, and any property valuations. Good record-keeping makes it easier to calculate your capital gain and to support your position if the ATO requests evidence.

Can I move back into the property to reset the 6-year period?

Potentially. If you genuinely move back into the property and re-establish it as your main residence, a new six-year exemption period may begin if you later rent it out again. The property must once again become your actual main residence.

Should I get tax advice before selling my property?

Yes. The 6-year rule, main residence exemption, and other CGT concessions can work together, but eligibility depends on your circumstances. Professional advice can help you minimise your tax liability and avoid unexpected outcomes when you sell.