Main residence CGT exemption: when it works and when it breaks

An expat sells the family home from London for $1.4M and discovers she owes $200,000 of capital gains tax on a property that, had she sold twelve months before leaving, would have been fully exempt. The main residence exemption is the largest single tax concession most Australians ever use. It is also riddled with conditions that most owners only learn about in the conveyancer's office, by which time the choices have already been made.

The headline rule, and why it covers most sales

If a property has been your principal place of residence (PPR) for the entire ownership period, the gain on sale is fully exempt from CGT. No apportionment, no calculation, no entry on the tax return. For owner-occupiers who buy a place, live in it, and sell when they move on, the exemption does its job quietly. Most family-home sales in Australia generate zero CGT for exactly this reason.

The exemption applies to the dwelling and up to two hectares of adjacent land used primarily for private purposes. Larger holdings, dual occupancies, and mixed-use buildings get partial treatment, but the standard suburban block on a quarter-acre is comfortably inside the rule.

The 6-year absence rule

Section 118-145 of the ITAA lets you move out of your PPR, rent it for up to six years, and still treat it as your main residence for the entire absence. The condition is that you do not nominate a different property as your PPR during that window. This is the single most-used CGT lever for ADF members on posting, expats working overseas, and anyone relocating interstate while keeping the door open to coming back.

The clock resets if you move back in and re-establish the property as your PPR. There is no statutory limit on the number of times you can use the rule across one ownership period; each fresh departure starts a new six-year window. Move out for five years, move back in for one, and you can move out again with the full six years available a second time. The catch is that during any absence you can only nominate one PPR at a time, so a second property purchased in the meantime forces an election that often kills the exemption on whichever home is currently growing in value faster.

The 6-month overlap when buying the next home

When you buy a new PPR before selling the old one, the ATO allows both to be treated as your main residence for up to six months, provided you sell the old one within six months of moving into the new one and the old property was your PPR for at least three months in the twelve months before sale. This is the standard bridge for move-up buyers and is the main reason a typical upsizing transaction does not trigger CGT on either dwelling.

Partial exemption: the apportionment math

When the property was not your PPR for the full ownership period, the gain is apportioned by days. If the property was PPR for X% of the days you owned it, X% of the gain is exempt and the remaining share is taxable. The rule is mechanical and unforgiving on calendar arithmetic.

Two further wrinkles change the answer. The "first used to produce income" rule (introduced in 1996) resets the cost base to the market value at the date the property is first rented out, if it was previously fully PPR-exempt. Owners who bought a house in 1990, lived there for 25 years, and first rented it in 2015 often assume the cost base is the original $180,000 purchase price. It is not. It is the 2015 valuation, which dramatically compresses the taxable gain. The second wrinkle: capital works depreciation claimed during the rental period reduces the cost base, so heavy depreciation schedules quietly inflate the gain when you eventually sell.

Worked example 1: the 6-year rule used cleanly

Sarah buys a Brisbane house in 2014 for $500,000 and lives there as her PPR for eight years. In 2022 she takes a five-year posting to Singapore, rents the house out, and does not buy or nominate any other property as her PPR. In 2027 she sells for $1,100,000.

The five years of rental absence sit inside the six-year threshold. Because she did not nominate a different PPR during the absence, the property is treated as her main residence for the entire 13-year ownership period. The $600,000 gain is fully exempt. CGT payable: $0. The cost of the absence rule, in this scenario, is exactly nothing.

Worked example 2: the same property, one wrong move

Same dates, same numbers, but on arrival in Singapore Sarah buys an apartment there and (through her tax agent) nominates it as her PPR. The 6-year absence rule no longer applies to the Brisbane house, because she has elected another property as her main residence during the absence.

The Brisbane house was PPR for 8 of the 13 years (about 62% by days), and rented for 5 (about 38%). The first-used-to-produce-income rule applies on the day she moved out: market value at that point was $850,000, which becomes the new cost base. The post-2022 gain is $1,100,000 minus $850,000 equals $250,000.

Because the cost-base reset on the day Sarah moved out already accounts for the eight PPR years (the entire pre-reset gain is exempt by virtue of the reset itself), the full $250,000 post-reset gain is assessable. Apply the 50% CGT discount for an individual holding longer than twelve months: $125,000 of taxable gain. At a 37% marginal rate, the CGT bill is roughly $46,250. The decision to nominate the Singapore apartment as PPR, often made casually on the basis that "I live there now," cost about $46,000 in this scenario. Run the numbers through the CGT calculator before electing.

The foreign-resident change that broke a lot of plans

Legislation passed in 2019 and effective from 30 June 2020 removed the main residence exemption for individuals who are foreign residents at the time of disposal. If you sell a property while you are tax-non-resident in Australia, you generally cannot claim the exemption at all, even if the property was your PPR for decades. The grandfathering window for properties owned before 9 May 2017 has now mostly closed.

The practical implication is brutal. An Australian who lived in a Sydney home for 30 years, took a job overseas in their late 50s, and sold the house from abroad without first re-establishing Australian tax residency loses the exemption on the entire gain. The fix, in most cases, is to either sell before departing, or to return and re-establish residency before the disposal contract is signed. Either path needs proper tax advice; the cost of getting it wrong is six figures on a typical capital-city home.

Death, subletting, and the home office

Deceased estates have their own concession. An inherited PPR retains full exemption if disposed of within two years of the date of death. Beyond two years the gain is apportioned, with the cost base typically reset to the market value at death for post-1985 dwellings.

Subletting and home-office use are the two most common ways owners accidentally taint an exemption. Renting out a single bedroom while continuing to live in the home creates a partial exemption proportional to the rented floor area and the rental period. Running a business from a dedicated home office with signage, client visits, and a deduction for occupancy costs has the same effect, although a study used incidentally for salary work does not. The ATO position has tightened in recent years, and listings on short-stay platforms create paper trails that survive a decade. If you are weighing the income against the future CGT exposure, model both sides; the CGT worked example article shows how the apportionment lands on a typical hold.

Where this fits

The main residence exemption is the most valuable concession in the Australian property tax system, and the rules around it have moved twice in the last decade. Burbfinder keeps the related pieces close together: the downsizing financials article covers the late-life sale that triggers the downsizer-super contribution, and the negative gearing in 2026 piece covers the other half of the property-tax conversation. Investors who let their PPR sit in the rental pool for too long, and expats who sell from abroad without checking residency, are the two cohorts who pay most of the avoidable CGT in this country each year. The rules reward people who plan twelve months ahead of a sale, not twelve days.