CGT: Treating Your Former Home As Your Main Residence

If you own a property which is your main residence, you can move out of the property for up to six years (or longer if it is not rented) and may still be eligible for a full capital gains tax (CGT) exemption, provided no other property becomes your main residence during this period.

How it works

Your main residence (your home) 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 6 years if you used it to produce income, such as rent (commonly referred to as the ‘6-year absence rule’)
• indefinitely if you didn’t use it to produce income.

During the time that you treat the property as your main residence after you stop living in it:

• It continues to be exempt from CGT (the same as if you were still living in it, even if you start renting it out after you leave).
• You can’t treat any other property as your main residence (except for up to 6 months if you are moving house).

Eligibility

The property must have:

• been your main residence first – you can’t apply the main residence exemption to a period before a property first becomes your main residence (for example, if you rented out your home before you lived in it, the main residence exemption doesn’t apply to the period you rented out your home)
• stopped being your actual main residence – that is, you stopped living in it.

If the property was continuously your main residence, the usual rules for the main residence exemption apply. This means if you use it to produce income, such as rent out part of the home on Airbnb, the ‘6-year absence rule’ won’t apply so you will only be entitled to a partial CGT main residence exemption. It is important to consider this when deciding to rent our part of your home, as the revenue earned may be significantly less that the impact of the home remaining fully eligible for the CGT main residence exemption.

If you are a foreign resident when a CGT event happens to your residential property in Australia (for example, you sell it), generally you aren’t entitled to claim the main residence exemption.

When and how to make the choice

You choose to treat a property as your main residence in the income year a CGT event happens to the property when preparing your tax return – for example, the year you sell it based on the contract sale date, not the settlement date.

Former home NOT used for income

If you don’t use your former home to produce income (for example, you leave it vacant or use it as your holiday house) you can treat it as your main residence for an unlimited period after you stop living in it. This only applies if you aren’t treating another property at the same time as your main residence.

Example: former home not used to produce income

• Bill bought a unit and lived in it for 3 years. He then moved out to live with a friend while his son occupied the unit rent free.
• Bill didn’t treat any other property as his main residence.
• Twelve years later, he sold the unit and claimed the main residence exemption from CGT.

Former home used for income
If you use your former home to produce income (for example, you rent it out or make it available for rent), you can choose to treat it as your main residence for up to 6 years after you stop living in it. This is commonly referred to as the ‘6-year absence rule’.

You can choose when to stop the period covered by your choice. For example, if you rented it out for 5 years, you can choose to treat the property as your main residence for 3 years. This may apply where you acquire a new property to use as your main residence.

If you’re absent more than once when owning the property, the 6-year period applies to each period of absence. A period of absence stops when you either stop renting your home and move back in or leave it vacant.

What happens if the 6-year limit is exceeded

If you use your former home to produce income for more than 6 years in one absence, it is subject to CGT for the period after the 6-year limit.

To work out your CGT when you dispose of your home:

• you need to work out your cost base, which is the market value of your home at the time you first used it to produce income, plus any allowable costs since then (this is the home first used to produce income rule)
• your capital gain or loss is based on the portion of time after first using your home to produce income; that is, over the 6-year limit.

Former home used for income before you move out

If you use any part of your home to produce income before you stop living in it, you can’t apply the continuing main residence exemption to that part.

This means you can’t get the main residence exemption for that part of your home either before or after you stop living in it.

Example: home used for income before ceasing to live in it

Helen signed a contract to buy a house in 2006 and moved in as soon as possible after settlement. Helen:

• used 75% of the house as her main residence and the remaining 25% as a doctor’s surgery
• moved out and rented out the house in 2018
• signed a contract to sell the house in 2024, making a capital gain of $400,000.

Helen chooses to treat the house as her main residence for the 6 years it was rented out.

As 25% of the house was used to produce income during the period before Helen stopped living in it, the same proportion of the capital gain is assessable: $400,000 × 25% = $100,000

Want to know more about how Bentleys can help you?

Make a time for a chat with us today. We’re here to help you get where you want to be.

Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.