Skip to content

CGT main residence exemption: the rules

The CGT main residence exemption is one of Australia’s most valuable tax concessions. If you live in a property and it is your principal place of residence, the capital gain on eventual sale is typically tax-free. The rules are specific, and small deviations from them can cost tens of thousands.

The basic exemption

A property is exempt from CGT if it was your main residence for the entire ownership period. No tax on the gain when you sell.

Conditions:

  • You moved in as soon as practicable after purchase
  • You treated it as your main residence throughout ownership (or invoked specific exceptions)
  • You did not produce income from it (no renting out the primary dwelling)

If any of these conditions breaks, the exemption is partial - the gain is apportioned between exempt and taxable periods.

“Main residence” is a factual test

The ATO applies multiple factors to determine main residence:

  • Where you sleep
  • Where your family lives
  • Where your mail is delivered
  • Where you are enrolled to vote
  • Where your driver’s licence is registered
  • Utility usage patterns
  • Duration of actual occupation

A 4-week stay while maintaining another property as your “real” home doesn’t qualify. Six months of genuine habitation is usually sufficient.

What if you rent out part of the property

If you rent out a room, or a separate dwelling on the same title (granny flat), a pro-rata portion of the property becomes taxable:

  • The proportion of floor area used to produce income
  • For the period it was used to produce income
  • Plus a proportional share of the building and land

This is one of the most commonly overlooked traps. A granny flat rented out for 5 years doesn’t just attract income tax on the rent; it also creates partial CGT liability on sale.

The six-year rule (covered separately)

The six-year rule allows you to rent out your former main residence for up to six years while still treating it as your main residence for CGT purposes - provided you don’t claim another property as your main residence during that period.

This is the exception that saves relocating families and property upgraders the most tax. Detailed rules in a separate article.

Pre-settlement period

The ATO allows you up to 6 months between settling on the new property and selling the old one during which both can be treated as main residence simultaneously. This “six-month overlap rule” is intended to accommodate normal property trades where you buy before selling.

Buying to build

If you purchase vacant land intending to build a main residence, the vacant land period (up to 4 years) can be included in the main residence exemption period, provided you:

  • Actually build the dwelling within 4 years of settlement
  • Move in as soon as the dwelling is habitable
  • Treat it as main residence for at least 3 months after moving in

Holding before moving in

If you purchase a property and hold it briefly (for reasons like a short-term tenant serving out their lease), you can still claim the exemption, provided you move in “as soon as practicable” after acquisition. The ATO’s interpretation of “practicable” is typically up to 3-4 months.

What disqualifies exemption entirely

  • The property was used to produce income for the majority of the ownership period
  • The property was owned in a trust or company structure (trusts and companies cannot claim the main residence exemption for their beneficiaries)
  • The property was held jointly with a non-resident spouse for any period (post-2020 changes)

Death of owner

If a property was the deceased’s main residence at the time of death, beneficiaries typically have 2 years to sell without triggering CGT. If they continue to occupy, the main residence status can transfer.

Non-resident rule (post-2020)

A significant rule change affects Australians who leave Australia. If the owner is a foreign resident at the time of disposal, the main residence exemption generally does not apply unless the property was disposed of within 6 years of departure and specific life events apply (terminal illness, death in family, divorce).

This rule caught many expats by surprise. Australian expats considering selling a former main residence should consult a tax specialist about the 6-year clock and the specific exceptions.

The math at stake

On a main residence purchased for $600k and sold 10 years later for $1.1m:

  • Capital gain: $500k
  • If fully exempt (standard main residence): CGT = $0
  • If 50% rented out for half the period: CGT ≈ $75k

The main residence exemption is worth low-hundred-thousands for most Australian homeowners. Protecting it with correct documentation (evidence of residence, utility bills, correspondence) is worth more than almost any other tax compliance effort.