The main residence exemption is the rule that means most Australians pay no capital gains tax when they sell their family home. It sounds simple, but renting out a room, running a business from home or moving out can turn a tax-free sale into a partly taxable one.
This guide explains how the main residence exemption works, when you only get a partial exemption and what to check before you sell. For investment properties, see our capital gains tax on investment property guide.
What Is the Main Residence Exemption?
Capital gains tax normally applies to any property you sell for a profit. The main residence exemption is the big exception. It applies to your home, meaning the dwelling you live in and the land under and around it, up to 2 hectares.
Main Residence Exemption Rules: 5 Conditions
- It must be your home. You (and your family) must actually live there. A property you only own does not qualify.
- Move in quickly. You generally need to move in as soon as practicable after buying, which is usually within a few months of settlement.
- One main residence at a time. You can only treat one property as your main residence for any period. A couple generally has one main residence between them. A short overlap of up to 6 months is allowed when you change homes.
- Land up to 2 hectares. The exemption covers the home and up to 2 hectares of land. Any land beyond that is taxed.
- Not used to earn income. Renting it out or running a business from it can reduce the exemption (see the next section).
Partial Main Residence Exemption: When You Pay Some CGT
A partial main residence exemption applies when only part of the property or part of the ownership period qualifies. Common situations include:
| Situation | Effect on the exemption |
|---|---|
| Renting out a room or granny flat | Part of the gain is taxable, based on floor area and time rented |
| Running a business from home (and claiming occupancy costs) | The business area is not exempt for the time it was used |
| Renting out the whole home after you move out | Exempt for up to 6 years under the 6 year rule capital gains tax exemption, partial after that |
| More than 2 hectares of land | Land over 2 hectares is taxable |
| Property bought but not lived in straight away | The period before you moved in may be taxable |
Worked Example: Partial Main Residence Exemption
Alex lived in a home for 10 years. For 5 of those years, Alex rented out a bedroom and bathroom, which is about 20% of the floor area. Alex sold for a gain of $200,000.
| Step | Amount |
|---|---|
| Capital gain on the sale | $200,000 |
| Taxable share: 20% of the home × 5 of 10 years | 10% |
| Taxable gain before discount | $20,000 |
| After 50% CGT discount (held over 12 months) | $10,000 |
| Amount added to Alex's taxable income | $10,000 |
Illustrative only. Real cases depend on how floor area and time are measured and on other facts. Speak to a registered tax agent about your situation.
Who Misses Out on the Main Residence Exemption?
- Foreign residents. Since 2020, people who are foreign residents for tax purposes when they sell generally cannot claim the exemption, with limited exceptions.
- Investors who never lived there. A property you only rented out is an investment property, not a main residence.
- Companies and most trusts. The exemption is mainly for individuals.
Common Mistakes With the Main Residence Exemption
- Assuming a home business has no tax effect when you have claimed occupancy costs.
- Claiming two homes as your main residence at the same time.
- Not keeping a valuation when you first start renting the home.
- Forgetting that land over 2 hectares is taxable.
- Choosing the wrong property when you own two homes. Think about which one has the bigger gain.
If part of the gain is taxable, you can work out the amount using the steps in our capital gains tax calculator Australia guide. The tax is then charged at your marginal rate, which you can check in our capital gains tax rate Australia guide.
Buying, Selling or Renting Out Your Home? Check Your Finance
Moving out and keeping your home as a rental changes your loan from owner-occupied to investment. That can affect your interest rate, your borrowing power and how you structure the next purchase. A broker can compare your options before you move. Learn more about investment loans and how to calculate negative gearing on a rented property.
Selling Your Home or Keeping It as a Rental?
Talk to a Melbourne mortgage broker before you decide, so the finance fits your tax plan.
Try Our Free Calculators Book a Free ChatMain Residence Exemption FAQs
What is the main residence exemption?
Do I pay CGT if I rent out a room in my home?
Can I have two main residences?
Is there a size limit on the main residence exemption?
Can foreign residents claim the main residence exemption?
This article is general information only and is not tax or financial advice. Speak to a registered tax agent or accountant about your situation.
