Insights · Property and lending
The main residence exemption from capital gains tax
For most people, their home is their biggest asset, and the main residence exemption means the gain on it is usually tax-free. But the exemption has conditions, and the common situations that break it, renting the home out, running a business from it, or moving overseas, are exactly the ones people don’t think about until they sell.
The full exemption
You get a full exemption from capital gains tax (CGT) when you sell a home if:
- it was your main residence for the whole time you owned it (you, your partner and dependants lived in it),
- it wasn’t used to produce income, so it wasn’t rented out, used as a place of business, or bought to renovate and flip, and
- the land is two hectares or less.
You need to move in as soon as practical after settlement. Simply intending to live there isn’t enough.
Moving out: the six-year rule
You can move out of your home, rent it out, and keep treating it as your main residence for up to six years for each period of absence. Move back in, and the clock resets. If you never rent it out, there’s no time limit.
The catch is that you can only have one main residence at a time. If you buy another home and live in it, you’ll need to choose which one to treat as your main residence for that period. There is a six-month overlap allowed when you buy a new home before selling the old one.
This rule is valuable for people upgrading and keeping their first home as an investment. Get the timing and the records right, and a large part of the gain can be tax-free. Talk to us before you move, because the decision affects how the property should be set up, including the loan. Our investment loans page explains why an offset account usually beats redraw.
Renting first, then moving in
If the property was rented before it became your home, you’ll get a partial exemption based on the days it was your main residence. The rest of the gain is taxable, although the 50% CGT discount applies if you’ve owned it for more than 12 months.
Running a business from home
Working from a desk in the spare room doesn’t affect the exemption. But if part of the home is set up as a place of business, such as a clinic, salon, or workshop that clients visit, and you claim interest or other occupancy costs, that part loses the exemption for the period it’s used. The same applies if you rent out a room or the home on Airbnb.
Granny flats
Since 1 July 2021, a CGT exemption applies to granny flat arrangements for older Australians and people with a disability, where there’s a formal written agreement. A commercial granny flat rental is different, and can reduce your exemption.
Foreign residents
If you’re a foreign resident for tax purposes when you sell, you generally can’t claim the main residence exemption at all, even for years you lived in the home as an Australian resident. There is a narrow exception for life events such as terminal illness, death or divorce within six years of becoming a foreign resident.
This catches Australians who move overseas for work and keep their home. Selling before you leave, or after you return and resume residency, can make a large difference. Purchasers may also need to withhold 15% of the price under the foreign resident capital gains withholding rules unless you provide a clearance certificate.
Deceased estates
When you inherit a home, the gain may be exempt if it’s sold within two years of the death and it was the deceased’s main residence. Other rules apply after two years.
Keep the records
Even if you expect the sale to be tax-free, keep the purchase contract, settlement statements, records of improvements, and dates you lived in and rented the property. They’re what prove the exemption, or reduce the gain if it’s partly taxable.
If you’ve rented out a former home, moved overseas, or used part of the home for business, we’ll work out the tax before you sign the contract. See personal tax returns.