Sell the home you live in and, in most cases, you pay zero capital gains tax. That is the promise of Australia’s main residence exemption — and unlike most tax promises, it genuinely covers millions of ordinary home sales every year. But it is not a blanket “my home is tax-free” shield. Three strict conditions decide whether you qualify, and a surprising number of sales only partly qualify — where a simple day-count formula decides how much of your gain is taxable.
This guide covers the three conditions, the partial exemption formula with a worked dollar example, the cost-base reset nobody tells you about, the 6-year rule, moving house, couples, deceased estates, expats — and how the 1 July 2027 CGT reform changes the math for partially-exempt gains.
The three conditions for a full exemption
Under section 118-110 of the tax law, a capital gain on your dwelling is disregarded only if you are an individual and:
1. The dwelling was your main residence for the whole ownership period. Not most of it — the whole of it. Any day it wasn’t your main residence (or deemed to be, via the 6-year or 6-month rules below) becomes a taxable day in the apportionment formula. “Main residence” isn’t just where you sleep: the ATO weighs where you and your family live, where your personal belongings are, where your mail goes, your electoral enrolment, whether gas and power are connected, and how long you intended to stay.
2. It was never used to produce assessable income. No renting it out, no running a business from an exclusive part of it, and — this one surprises people — no buying it to renovate and flip for a profit. Buying with the intention of profiting can deny the exemption even if you lived there while doing the renos.
3. The land is 2 hectares or less. The adjacent land must also be used primarily for private or domestic purposes. Hobby farm blocks over 2 hectares can never be fully exempt, no matter how much you love them.
Meet all three for every day you owned the place and the gain is ignored entirely. Fail any of them for any period and you land in partial-exemption territory — where the real money questions start. The ATO’s eligibility guide confirms each condition.
Partial exemption: the formula (and why contract dates matter)
When you only partly qualify, section 118-185 apportions your gain by days:
Taxable gain = Total capital gain × (days the dwelling was used to produce income ÷ total days of ownership)
Days are counted on contract dates, not settlement dates — the day you signed the purchase contract to the day you signed the sale contract. A 6-week settlement delay that pushes you past a boundary can change the numbers. The ATO’s guide to using your home for rental or business confirms the day-count method and works its own floor-area examples.
A worked example:
Example. You buy a townhouse for $520,000 on 1 January 2020 and rent it out immediately. On 1 January 2022 you move in and make it your genuine main residence. On 1 January 2027 you sign a sale contract for $830,000.
Your gross gain is $830,000 − $520,000 = $310,000. Days owned: 2,557. Days income-producing: 731. Taxable portion: $310,000 × 731 ÷ 2,557 = $88,623. Because you held the property more than 12 months, the 50% discount (still available for 2026-27 disposals) halves that to a $44,312 net capital gain, taxed at your marginal rate.
The exempt $221,377 — the gain accruing while it was your home — simply disappears from your tax return.
The cost-base reset nobody tells you about
Here is the single most financially valuable mechanic in the exemption, and the one almost every mainstream guide omits. Section 118-192 — the “home first used to produce income” rule — says that if your home was fully exempt immediately before you first rented it out (and that first rental was after 20 August 1996), you are deemed to have re-acquired it at its market value on that date.
Every dollar of purchase cost, stamp duty and buying expenses before that date is wiped out of the calculation. Only costs incurred after the rental began count. In exchange, your cost base starts much higher.
Example (based on the ATO’s own Erin case). You buy for $450,000 in July 2014 and live in it. In August 2025 you move out and rent it at a market value of $650,000. You sell in June 2026 for $696,000. Your gain is $696,000 − $650,000 = $46,000 — not $246,000. One catch: because the deemed acquisition was less than 12 months before the sale, the 50% discount doesn’t apply to this gain.
The reset does not apply if the property was income-producing from the day you bought it (rent first, live later — the clock never starts), if it was inherited and sold within two years, or if you used the 6-year absence choice to stay fully exempt anyway. And here is the practical point that matters most: you must get a market valuation on the day you first rent the home out. Retrospective valuations are possible but expensive and arguable; a valuer’s report on the move-out date is worth its weight in gold.
Renting out part of your home, or working from it
Renting a bedroom, taking in a boarder, running an Airbnb room or building a granny flat does not poison the whole property. You keep a partial exemption on the income-producing portion, worked out by floor area × time — the ATO’s own worked examples use exactly this method.
But does working from home trigger CGT? The law uses a test in section 118-190: ask whether you could have claimed a deduction for home-loan interest on that part of the home. Merely working from home by choice or convenience — laptop on the kitchen table, or even a study you also use privately — does not qualify, so the full exemption survives. Running a business from a part of the home set aside exclusively as a place of business, not readily adaptable for private use (the classic example is a doctor’s surgery inside the home), makes that portion income-producing — and partially taxable on sale.
Granny flats deserve their own note. A granny flat occupied by family at non-commercial rent is a “non-economic rental” — not income-producing, full exemption preserved. A granny flat rented at market rent to a third party can be treated as a separate asset with its own CGT bill, even on the same block as your exempt home — settle that question with your accountant before the slab goes down.
Moving house: the 6-month overlap and the 4-year building rule
Only one dwelling can be your main residence at a time — but the law gives you a bridge. Section 118-140 lets both the old and new home be treated as your main residence for up to 6 months while you move, provided the old home was your main residence for a continuous 3 months in the 12 months before you sell it, it wasn’t used to produce income in that 12 months, and the new home becomes your main residence.
Take longer than 6 months to sell the old place and only the last 6 months are covered — the excess days become taxable pro-rata, unless you use the 6-year absence choice for the excess instead.
Building or substantially renovating on land you already own gets its own concession: section 118-150 lets you treat the land as your main residence for up to 4 years before the dwelling exists while you build, repair or finish it — provided you move in as soon as practicable and live there for at least 3 months.
The 6-year absence rule, in brief
Move out of your home and you can keep treating it as your main residence for up to 6 years while it’s rented, or indefinitely while it’s vacant — section 118-145. The non-negotiable condition: it must have been your main residence first. A property that was rented before you ever lived in it can never use this rule. You can’t treat another property as your main residence during the absence (except the 6-month moving overlap), each separate absence gets its own 6-year clock, and moving back in genuinely — as a real main residence, not a token stay — resets the clock with no limit on how many times you can cycle it.
The reset has real teeth but also real limits: a five-day “move back” between tenancies will not survive the ATO’s main-residence factors, and moving back in does not reset the section 118-192 deemed-acquisition date. The ATO’s guide to treating a former home as your main residence confirms each of these conditions. We covered this rule in depth — with a full worked example — in our 6-year CGT rule guide.
Couples: only one exemption between spouses
Section 118-170 is the rule couples trip over. For any given period, there is only one main residence between spouses — two people do not get two exemptions. If you and your spouse have different homes for a period, you must either choose one of the homes as the main residence for both of you, or nominate different homes and split the exemption: if you own 50% or less of your nominated home, your share is exempt; if you own more than 50%, your share is exempt for only half the overlapping period.
The same choose-one-home logic applies if you and a dependent child under 18 have different homes. Get advice before any property settlement is signed, not after.
Special cases: deceased estates, vacant land and big blocks
Deceased estates. When the deceased bought the home on or after 20 September 1985, was living in it as their main residence just before death, and it wasn’t income-producing, the beneficiary or trustee can disregard the capital gain if they settle the sale within 2 years of death. Genuine estate delays (will challenges, a life tenancy, a failed settlement) can earn an extension — PCG 2019/5 grants up to 18 months automatically when five conditions are met. For pre-20 September 1985 acquisitions: no gain if the deceased’s spouse, a person with a right to occupy under the will, or the beneficiary kept living there from death until disposal. We cover the full estate mechanics in our CGT on inherited property guide.
Vacant land and subdivisions. Vacant land is never your main residence, so selling it never attracts the exemption. If you subdivide and sell off part of your home block, the sold land portion is a separate CGT asset — the main-residence exemption covers the dwelling and its curtilage, not a newly created lot you sell to a developer.
Big blocks. Adjacent land is exempt only up to 2 hectares in total including the land under the dwelling, and only if used primarily for private or domestic purposes. If your block is larger, you may choose which 2 hectares are exempt (the land under the dwelling must be included). A correction worth making, because a top-ranking competitor gets it wrong: there is no “reasonable enjoyment of the dwelling” exception in Australia that exempts land over 2 hectares. That is UK law. Here the 2-hectare cap is a hard cap.
Expats and foreign residents: the harshest version of the rule
Since 30 June 2020, if you are a foreign resident for tax purposes at the date you sign the sale contract, you get no main residence exemption at all — not even a partial one, and the 6-year absence choice is dead too. The section 118-192 cost-base reset is also denied. The only escape is the life events test: you were a foreign resident for a continuous period of 6 years or less, and during that period you or your spouse or young child had a terminal medical condition, your spouse or young child died, or the sale happened under a formal agreement on relationship breakdown.
The strategy questions this raises are blunt. If a move overseas is planned and a sale is likely, sell before you become non-resident — residency is tested at the contract date. If you already live overseas and the gain is large, re-establishing Australian tax residency before signing a sale contract can restore the exemption entirely. Note also the separate 15% foreign-resident CGT withholding at settlement from 1 January 2025 — a credit against the final tax, but it affects your cash flow. For how the discount rules apply generally, see our 50% CGT discount guide.
The 1 July 2027 reform and your records checklist
From 1 July 2027, the 50% CGT discount is replaced by cost-base indexation plus a 30% minimum tax on net capital gains for assets held more than 12 months. Crucially, the main residence exemption itself is unchanged — the full exemption for owner-occupied homes continues exactly as before. What changes is only how the taxable slice of a partially-exempt gain is worked out: the pre-1-July-2027 portion of a gain keeps the old discount treatment, while the portion accruing on or after 1 July 2027 moves to indexation plus the 30% floor.
That makes record-keeping the real action item. For any home that was ever partly income-producing, keep defensible valuations for these four dates: (1) purchase, (2) the day it was first used to produce income, (3) around 30 June 2027 (to split pre-reform and post-reform accrual), and (4) sale. The third one is new — a valuation as at mid-2027 is now as important as the first-rental valuation.
Common mistakes that cost people thousands
Assuming the rental years “merge” into the exemption. They never do. Moving into an investment property does not backdate anything — the rental years stay taxable by day-count, and no cost-base reset applies because the income use came first.
Counting settlement dates instead of contract dates. Both the ownership period and the CGT event run on contract dates. Settlements can shift gains across financial years in people’s heads; the law doesn’t care about settlement.
Treating a token move-back as a clock reset. Moving “back in” for a fortnight between tenancies does not restart the 6-year absence rule. The ATO applies the same main-residence factors — mail, electoral roll, utilities, real duration.
Tips for getting the most from the exemption
Model the partial-exemption math before you sell — the day-count formula means a sale a few months earlier or later can materially change the taxable slice. If you ever rented the home out, confirm whether the section 118-192 deemed acquisition applies and dig out that first-rental valuation now. Run the numbers on our CGT calculator, and read our complete property CGT guide for the full sale-to-tax-return walkthrough.
Frequently asked questions
I rented my home out for three years, then lived in it for seven. How much is taxable?
The gain is apportioned by days: roughly 3 years of income-producing days over 10 years of ownership is taxable (about 30%), before the 50% discount applies to disposals up to 30 June 2027.
Can I claim the exemption on two properties if my spouse and I live apart?
No. There is only one main residence between spouses for the same period. You must choose one home for both of you, or nominate different homes and split the exemption under section 118-170.
What happens if I move overseas and sell my Australian home?
If you are a foreign resident at the contract date and sell after 30 June 2020, you lose the exemption entirely unless you meet the life events test. Consider selling before becoming non-resident or re-establishing residency before selling.
Will the 2027 CGT changes affect my main residence?
No — the full main residence exemption continues unchanged. The reform only changes how the taxable portion of a partially exempt gain is calculated for accruals from 1 July 2027: indexation plus a 30% minimum tax instead of the 50% discount.
The bottom line
The main residence exemption is generous but mechanical. It rewards one thing above all: records kept at the right moments — the contract dates, the valuation on the day the home was first rented, and now a valuation around 30 June 2027. Most of the expensive mistakes here aren’t loopholes that closed; they’re valuations that were never obtained and day-counts that were never done. This article is general information, not personal tax advice — for large gains or foreign residency issues, an hour with a property-tax specialist is the cheapest insurance there is.
