The 6 year rule for capital gains tax lets you keep treating a former home as your main residence for up to six years after you move out and rent it out, so if you sell within that window you can disregard the entire capital gain. The rule sits in Section 118-145 of the Income Tax Assessment Act 1997 and extends the standard main residence exemption to a period of absence.1Australian Legal Information Institute. Income Tax Assessment Act 1997 – Sect 118.145 Absences It is a choice you make, not automatic, and it comes with conditions that decide whether your exemption is full or partial.
How the Six-Year Rule Works
Once you stop living in your main residence and start using it to produce income, typically by renting it or making it available for rent, you can elect to keep treating it as your main residence for up to six years. During that window any capital gain on a sale is fully exempt, just as if you were still living there.2Australian Taxation Office. Treating Former Home as Main Residence
The count starts from the date you move out, not the date the first tenant arrives. The statute states the limit directly: if the dwelling is used to produce assessable income, you can treat it as your main residence for a maximum of six years after you stop living in it.1Australian Legal Information Institute. Income Tax Assessment Act 1997 – Sect 118.145 Absences
The Clock Resets Each Absence
The six years is not a lifetime cap. It applies separately to each period of absence. If you move back in and re-establish the property as your main residence, then leave again, a new six-year period begins. The ATO puts it plainly: “If you’re absent more than once when owning the property, the 6-year period applies to each period of absence.”2Australian Taxation Office. Treating Former Home as Main Residence The statute reinforces this, saying you are “entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence.”1Australian Legal Information Institute. Income Tax Assessment Act 1997 – Sect 118.145 Absences
Moving back in has to be genuine. A brief visit will not stand up under audit. The property needs to actually become your main residence again before a fresh absence period can start.
Vacant Instead of Rented
If you leave the property but do not use it to produce income, whether left vacant or kept as a holiday home, you can treat it as your main residence indefinitely. There is no time limit in that situation, as long as you do not claim another property as your main residence over the same period.2Australian Taxation Office. Treating Former Home as Main Residence Extended travel, a long secondment, or simply preferring not to lease the place all fit here.
You Can Only Have One Main Residence at a Time
Choosing the six-year rule for your former home means no other dwelling can be your main residence for the same period. The statute is explicit on this point.1Australian Legal Information Institute. Income Tax Assessment Act 1997 – Sect 118.145 Absences If you buy and move into a new home, you generally have to decide which property receives the exemption. Applying the six-year rule to the old home means the new one is exposed to CGT for the overlap.
There is one exception. When you are moving house, both properties can be treated as your main residence for up to six months, provided you lived in the old home as your main residence for a continuous period of at least three months in the 12 months before selling it, you did not use it to produce income during that 12-month period when it was not your main residence, and the new property becomes your main residence.3Australian Taxation Office. Moving to a New Main Residence If the sale drags out beyond six months, only the final six months before disposal get the dual treatment, and you choose which property gets the exemption for the earlier period.
What Happens If You Sell After Six Years
Going past the six-year limit does not destroy your exemption. It converts to a partial one. The ATO calculates the taxable share based on the time the property was not covered by the main residence exemption as a fraction of your total ownership period.4Australian Taxation Office. Partial Exemption
The formula is:
Taxable capital gain = Total capital gain × (non-exempt days ÷ total days of ownership)
Say you owned a property for 5,000 days and it was your main residence, including the six-year absence coverage, for 4,000 of those days. Only 1,000 ÷ 5,000, or 20 per cent, of the capital gain is taxable. The other 80 per cent is exempt.
The 50 Per Cent CGT Discount
Hold the property for at least 12 months before selling and the taxable portion qualifies for the standard 50 per cent CGT discount. The discount applies after the partial exemption calculation, so it halves only the non-exempt slice.2Australian Taxation Office. Treating Former Home as Main Residence For long-held properties, the combination can bring the final tax down substantially.
Market Value Substitution and Records
When you first rent out a former main residence after 20 August 1996, Section 118-192 resets the cost base to the property’s market value on the date income production begins. Any growth in value while you were living there stays out of the CGT calculation, regardless of the partial exemption maths.5Australian Legal Information Institute. Income Tax Assessment Act 1997 – Sect 118.192
The statute does not demand a formal valuation, but getting a professional property valuation on the date you first rent the home out is worth doing. A contemporaneous valuation report holds up in an audit far better than a retrospective estimate. Alongside it, keep:
- Move-in and move-out dates, which set your exempt and non-exempt periods.
- Rental income records: leases, rent receipts, property management statements.
- Capital improvement invoices for renovations or structural additions during the rental period, which add to the cost base.
- Ownership cost records: land tax, council rates, insurance, agent fees.
The ATO offers a free online capital gains tax record-keeping tool that tracks your cost base and helps calculate your net capital gain or loss when you sell.6Australian Taxation Office. Capital Gains Tax Record Keeping Tool
Inherited Property
The rule also travels through a deceased estate. If a property owner dies, the main residence exemption and any absence period covered by the six-year rule can pass to the beneficiaries or the trustee. Whether the exemption is full or partial depends on when the deceased acquired the property and whether it was their main residence at death.7Australian Taxation Office. Inherited Main Residence
Changes introduced in December 2019 restrict the exemption where the deceased was a foreign resident for more than six continuous years at the time of death; in that situation the beneficiary may not be able to claim the main residence exemption for the deceased’s ownership period. Estates involving an absence period or foreign residency are worth putting in front of a tax adviser before you sell.