For most Australians, the family home is the largest asset they will ever own — and the main residence exemption means that, in most cases, they will never pay capital gains tax (CGT) on it. But the exemption is not automatic in every situation. Renting the home out, running a business from it, owning land over a certain size, or moving out for a period can all reduce or complicate the exemption. Understanding the rules — especially the six-year absence rule — can protect a large, tax-free gain.
This guide sits under our pillar, capital gains tax in Australia, and pairs closely with CGT on investment property.
The full main residence exemption
A dwelling is generally fully exempt from CGT if, for the whole time you owned it:
- It was your home (your main residence),
- You did not use it to produce income (you didn’t rent it out or run a business from it), and
- It sits on land of two hectares or less.
Meet all three and any gain on sale is completely disregarded — you don’t even report it. This is why the family home is such a tax-effective asset to build wealth in.
What makes a dwelling your “main residence”?
There is no single test, but the ATO looks at factors such as where you and your family live, where your mail is sent, your address on the electoral roll, and where your personal belongings are kept. You can generally only have one main residence at a time (with a limited overlap allowed when you are moving between homes).
Partial exemption
If the property was your home for only part of the ownership period, or you used part of it to earn income, the exemption is usually partial. The taxable gain is generally apportioned based on the number of days the dwelling was not your main residence relative to the total days you owned it.
Common situations that trigger a partial exemption:
- You lived in the home, then moved out and rented it (beyond what the six-year rule allows).
- You bought the home as an investment first, then later moved in.
- You used a dedicated room or portion of the home to run a business or as a home office you claimed against.
For example, if you owned a home for 10 years and it was genuinely your main residence for 6 of those years and a rental for 4, roughly 40% of the gain could be taxable (before applying the 50% discount).
The six-year absence rule
This is the rule worth knowing. If you move out of your main residence and rent it out, you can continue to treat it as your main residence for CGT purposes for up to six years — keeping the gain exempt for that period, as if you never left.
Key features:
- The six-year clock resets each time you move back in and re-establish the home as your main residence, then move out again.
- If you move out but do not produce income from the home (you leave it vacant), the exemption can continue indefinitely, not just for six years.
- You generally cannot claim the exemption on two homes at once, so if you buy another home to live in, you may have to choose which one gets the exemption for the overlapping period.
This rule is powerful. Someone posted overseas for work, for instance, can rent out their home for up to six years and still sell it CGT-free within that window.
Worked example: the six-year rule
Liam buys a home and lives in it for three years, then takes a job interstate and rents the home out for five years before selling it. Because five years is within the six-year limit and he did not claim another property as his main residence during that time, the entire gain can be fully exempt — no CGT payable.
Had he rented it out for eight years instead, only the first six years of the absence would be covered. The remaining two years would count as a non-main-residence period, making part of the gain taxable (then eligible for the 50% discount).
Other nuances to watch
- Land over two hectares. The exemption is capped at two hectares of land around the dwelling; a gain on the excess land can be taxable.
- Home-based businesses. Claiming a portion of your home as a business expense (occupancy costs) can expose that portion to CGT on sale.
- First used to produce income. If you move out and start renting a home that has always been your main residence, a special rule can reset its cost base to market value at that date — potentially reducing a future gain.
- Inherited homes. A deceased person’s main residence has its own rules, including a two-year window — see CGT on inherited assets.
Building your first home on the block
The exemption generally applies to a dwelling, so vacant land is not covered while it sits empty. If you buy land and build a home to move into, there is a concession that can let you treat the land as your main residence from the time you acquire it, provided you move in as soon as the dwelling is finished and live there for a minimum period. There are time limits on how long the building can take, so if you are constructing a home you intend to live in, check the current rules at ato.gov.au before assuming the exemption stretches back to the land purchase.
Couples and the one-residence rule
Members of a couple (spouses or de facto partners) can generally only have one main residence between them at a time. If you and your partner each own a home and live apart, you either nominate one property as the shared main residence, or split the exemption 50/50 across the two — in which case each home is only partly exempt. This commonly arises when two people who each owned a home move in together. It is worth planning around before selling either property, because the choice affects the CGT on both.
Strategies and pitfalls
- Keep evidence of when a property was your main residence — utility bills, electoral roll, removalist receipts.
- Track the six-year windows carefully if you move in and out.
- Choose wisely which property to nominate as your main residence when you own two, as it affects both.
- Don’t assume the family home is always fully exempt — renting it, business use or large land can create a partial gain.
Because these rules interact with the property cost base and depreciation and the 50% discount, it is worth mapping out the dates and uses of the property before you sell.
This article is general information only and not financial or tax advice; consider your own circumstances and speak to a licensed adviser or the ATO before acting.