The 6-year CGT rule can allow you to treat a property as your main residence for up to 6 years after moving out. Here is how it works and the conditions that apply.
One of the most useful, and frequently misunderstood, provisions in Australian capital gains tax law is the six-year main residence exemption rule. In the right circumstances, this rule allows a taxpayer to treat a property as their main residence for CGT purposes for up to six years after they have moved out of it.
Used correctly, the six-year rule can completely eliminate CGT on a property sale, even for a property that was rented out for the entire period. This article explains how the rule works, the conditions that must be met, and the common mistakes to avoid.
The main residence exemption in Division 118 of the Income Tax Assessment Act 1997 provides that a capital gain or loss made on the disposal of a dwelling that was the taxpayer’s main residence throughout the ownership period is generally exempt from CGT.
This exemption is one of the most significant tax benefits available to Australian residents, and it underpins the long-held belief that the family home is CGT-free. For most straightforward cases, where a person buys a home, lives in it continuously, and then sells it, the exemption applies fully and automatically.
The complexity arises when the property is used for purposes other than being the owner’s main residence, including the situation where the owner moves out and rents the property to tenants.
When a taxpayer moves out of their main residence, the main residence exemption does not immediately cease to apply. Under section 118-145 of the ITAA 1997, a taxpayer may continue to treat a dwelling as their main residence for CGT purposes for up to six years after they ceased to live in it, provided the dwelling is used to produce income (such as rent) during that period.
If the property is not used to produce income after the owner moves out, for example, if it is simply left vacant, the property can be treated as the owner’s main residence indefinitely while they are absent.
The six-year period resets each time the taxpayer moves back into the property as their main residence and then moves out again. This means it is theoretically possible to use the rule multiple times over a long ownership period. Two further points are worth knowing. If you sell more than six years after moving out while the property has been rented, the exemption is not lost entirely, the gain is apportioned, and only the period beyond the six years is exposed to CGT. And when a home is first used to produce income, a special market value rule generally deems you to have acquired it at that time for its market value, so a contemporaneous valuation at first rental protects any future calculation.
There is an important restriction on the six-year rule: a taxpayer can generally only have one main residence at a time for CGT purposes. If you move out of your existing home and purchase or rent a new home, you must elect which property to treat as your main residence for CGT purposes.
If you elect to continue treating your former home as your main residence under the six-year rule, your new home will not be eligible for the main residence exemption for the overlapping period.
The election does not need to be made formally at the time. It is typically made on the sale of one of the properties, when the tax position is calculated. However, understanding the options available before selling either property is important.
Changes to the law effective from 2017 removed the ability of foreign residents to access the main residence exemption. This interacts with the six-year rule in a way that catches many taxpayers by surprise.
If you are a foreign resident when you sell a property, even a property that you lived in as your main residence for many years, you cannot access the main residence exemption, including the six-year extension. The exemption is lost for the entire ownership period, not just the years spent abroad. The changes applied from 9 May 2017, with transitional arrangements that ended on 30 June 2020, and the only carve-out is a narrow ‘life events’ exception available within six years of ceasing residency.
For Australians who have moved overseas and are considering selling their former home, ensuring that residency is correctly assessed before the sale is therefore critically important.
In a case handled by our office, a client who had moved from Australia to the UK sold her Sydney home while living abroad. The ATO had issued a private ruling determining she was a foreign resident, which would have meant no main residence exemption and a capital gains tax liability of over $350,000.
Our office successfully objected to that determination, establishing that she remained an Australian tax resident under the domicile test. Once her residency was correctly determined, she was entitled to apply the main residence exemption with the six-year rule extension, reducing her capital gains tax liability to nil.
This case illustrates both the power of the six-year rule and the critical importance of having residency correctly assessed before a property sale.
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