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6 Year Rule for Capital Gains Tax in Australia: How It Works

The 6 year rule capital gains tax exemption can keep your main residence status for up to six years after you move out and rent your home. Here are the conditions, a worked example and the traps to avoid.

The 6 year rule capital gains tax exemption (also called the 6 year CGT rule) lets you keep treating a property as your main residence for up to six years after you move out, even while you rent it out. If the 6 year rule capital gains tax exemption applies, you may pay no CGT on the sale for that period.

It is one of the most useful rules for owners who want to keep their first home as an investment. For the wider picture, see our capital gains tax on investment property guide.

6 Year Rule Capital Gains Tax in Plain English

Normally, a property you rent out is an investment, and the gain is taxed under CGT rules. The 6 year rule is an exception. It says the property can keep its main residence status after you move out, if you use it to produce income such as rent.

Conditions for the 6 Year Rule Capital Gains Tax Exemption

1. It must have been your home first. You need to have lived in the property as your main residence before moving out.
2. You make the choice. There is no form to lodge. You simply choose to treat it as your main residence when you complete your tax return for the year of sale.
3. Only one main residence at a time. You cannot claim another property as your main residence for the same period. The exception is a short overlap of up to 6 months when you change homes.
4. Up to 6 years per absence. The 6 years apply to each period of absence. If you move back in and move out again, a new 6 year period can start.

6 Year Rule Capital Gains Tax: Worked Example

Sam bought a home in Melbourne for $600,000, lived in it for 3 years, then moved interstate and rented it out. After 5 years of renting, Sam sold it for $900,000.

Illustrative only. The cost base and market value rules can change the numbers in a real case.

What If You Rent It Out for More Than 6 Years?

If the absence runs past 6 years, you only get a partial exemption. The gain is split by time: the days you lived there and the first 6 years of renting are exempt, and the days beyond that are taxable.

Any taxable portion can still get the 50% CGT discount if you owned the property for more than 12 months.

The Cost Base Trap: Get a Valuation

When you first rent out a home that was your main residence, the cost base is generally reset to its market value on the day it first earned rent. That is why you should get a written valuation at the time you move out. It becomes your starting point if you later have a taxable gain.

Common Mistakes With the 6 Year Rule Capital Gains Tax Exemption

• Claiming a new home as your main residence while still using the 6 year rule on the old one.
• Not getting a valuation when you start renting.
• Assuming the rule applies to a property you never lived in.
• Forgetting that the 6 years are counted per absence, not once per property.
• Missing that the main residence exemption does not remove rental income tax during the rental years.

Keeping Your Home as an Investment: The Finance Side

Renting out your old home usually means telling your lender, because the property changes from owner-occupied to investment. That can affect your interest rate and how much you can borrow for your next home. A broker can compare your options before you move. Learn more about investment loans and how to calculate negative gearing on a rented property.

6 Year Rule FAQs

This article is general information only and is not tax or financial advice. Speak to a registered tax agent or accountant about your situation.