The family home is often the largest asset a taxpayer will own, and it is considered sacred when it comes to taxation. Since the introduction of capital gains tax (CGT) in 1985, government policy has exempted the family home. Everyone knows it is tax-free.
The main residence exemption (MRE) makes up two of the Commonwealth’s top four largest tax expenditure items, according to the latest annual 2024–25 Tax Expenditures and Insights Statement, which estimates the revenue foregone in 2024–25 due to the MRE at $51.5 billion. Yet governments are hesitant to make changes that would lessen the generous concession available to homeowners.
While property used wholly for investment purposes falls squarely within the CGT net, the tax treatment of property sales involving the family home is more complex and is often obfuscated by myths and misconceptions. Below are some of the common ones.
How long do I have to live at a property before it becomes my main residence?
Ask around, and you’ll get answers ranging from three months, six months or 12 months to ‘I’m not sure’. The answer is simple: there is no specified duration as it is based on fact.
A series of factors are relevant to determining whether a dwelling is your main residence (MR). These factors were previously listed in withdrawn Taxation Determination TD 51 (issued on 26 March 1992) and are now set out in ATO web guidance:
- how long you live there — importantly, there is no minimum time a person must live in a dwelling before it is considered to be their MR;
- whether your family lives there;
- whether you have moved your personal belongings into the dwelling;
- the address to which your mail is delivered (an interesting factor today given the increasing use of electronic mail);
- your address on the electoral roll;
- connection of services and utilities (e.g. telephone/internet, gas, electricity, water); and
- your intention in occupying the dwelling (noting that mere intention is not enough).
Correctly applying the six-year absence rule
The above factors are also relevant to the six-year absence rule in section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997) in looking at when a dwelling ceases to be your MR. Most people have heard of the six-year absence rule but find it confusing to apply in practice.
This rule enables you to continue to treat a dwelling — that was your MR, and which ceases to be your MR — as your MR:
- for up to six years — where it is used for the purpose of producing assessable income (the maximum six-year period resets each time the dwelling successively becomes and ceases to be your MR); or
- indefinitely — where it is not used to produce assessable income.
Common questions
Is the MRE available only if I move back to the property before selling it?
No. You do not have to move back to a property and live in it as your MR before you sell it to access the MRE. A dwelling that was previously your home and which is rented each time for no more than six years will be tax-free (unless you are a foreign resident, and there are limited exceptions to this broad prohibition). If you rented the property for more than six years, you need to pro-rate the taxable gain to exempt the initial six-year period.
Do I have to move back to the property to reset the six-year period?
Yes. A dwelling that was your MR may be rented for successive periods of up to six years and sold tax-free, but these successive periods must be punctuated by periods in which the property again becomes your MR.
How long do I have to move back to a property before it can be treated as my main residence?
As discussed above, there is no set period; it is a question of fact whether the property is your MR.
If I rent my home for no more than six years, it’s always tax-free, isn’t it?
No. If you lived in a dwelling as your MR immediately after you bought it for, say, eight years then rented it for, say, two years, the property will be exempt from CGT. However, if you instead rented the dwelling for the first two years you owned it then lived in it as your MR for the next eight years before selling it, CGT will apply on a pro-rated basis. The six-year absence rule is not available where the dwelling is rented before you live in it, even if you rented it for no more than six years. This is because the dwelling has not ceased to be your MR when you rented it.
I don’t want to reset the cost base of my property to its market value when I first rented it. I don’t have to, do I?
Yes. Where you first rented your property on or after 20 August 1996 and it would have been tax-free had it been sold just before you first rented it, the cost base of the property is reset to its market value at that time under section 118-192 of the ITAA 1997. This rule is not optional, does not allow you to include stamp duty paid on purchase and can disadvantage those who first rent their homes in a cooler market than when it was purchased.
I rent out my home through Airbnb for a few weeks each summer. As it’s rented for less than six years at a time, my home will still be tax-free when I sell it, won’t it?
No. You can use the six-year absence rule to continue to treat a dwelling as your MR only if you have ceased to treat that dwelling as your MR. Where it is rented for a few weeks over the summer, the dwelling hasn’t ceased to be your MR. The utilities remain connected to the property in your name, your personal belongings remain in the property, and you remain on the electoral roll. You are using your home to produce income so all the rent is assessable, apportioned deductions are allowed under the normal rules and the property will be subject to CGT upon sale on a pro-rated basis.
Holding two homes at the same time
Can I have two properties as my main residence at the same time?
Two properties can be treated as your MR at the same time in limited circumstances.
One of these is the rule in section 118-140 of the ITAA 1997 which allows the MRE to apply to two properties at the same time for up to six months. This maximum six-month period is worked out by counting back from when your ownership interest in your existing home ends (on the date of settlement). This rule exists to recognise that, in the real world, we may not buy and sell our homes on the same date.
Importantly, the six-month period is not that following the date on which the new home is bought (date of settlement); rather, you go back in time from the date on which the old home was sold, up to a maximum of six months.
So, if you bought your new home three months before selling the old one, the overlap period is only three months — you don’t automatically get a six-month overlap but nor do you need it for more than three months. However, if you bought the new home eight months before selling the old home and choose to apply the MRE to the old one, the first three months of owning the new home is subject to CGT. This must be disclosed when you sell it in the future, which may be many years from now.
What about my holiday home which I don’t rent?
Generally, you cannot apply the MRE to two properties at the same time. You need to decide which one you will apply the MR to — one will be exempt, the other will be subject to CGT when sold. You cannot choose to exempt the holiday home because it has a larger unrealised gain. It is a question of fact whether the holiday house is, or can be treated as, your MR, having regard to the factors listed above.
Be sure to keep good records of your holding costs where you bought the property after 20 August 1991, so costs such as interest on the mortgage, insurance, council rates, repairs and maintenance and land tax can be included in the third element of cost base to reduce your taxable capital gain.
‘But I intended to live in it …’
Can I use the four-year construction rule where I bought land with the intention of building a home on it, but it was sold before I built/moved into it?
The four-year construction rule in section 118-150 of the ITAA 1997 exempts the capital gain by allowing you to treat vacant land or land under construction as your MR where:
- the land is acquired, the dwelling is constructed and you begin to live in it within four years;
- you live in the dwelling for at least three months; and
- you are not treating another dwelling as your MR during this period.
You may have had good intentions, but a mere intention to build a home on the land and move into it is not sufficient. If you decide to ‘cash in your chips’ and sell the land prior to construction with an approved development application, the MRE is not available. Further, if the conditions above are not satisfied, only a partial exemption may apply.
‘Can we have one each?’
These days with more non-nuclear families, it is not uncommon for a taxpayer and their spouse/partner to each wholly own a property before getting together. Section 118-170 of the ITAA 1997 is clear in this situation: only one property is eligible for the MRE between you.
This means that:
- you can claim the MRE wholly on your property, exposing their property to CGT;
- they can claim the MRE wholly on their property, exposing yours to CGT; or
- you can both claim the MRE on your respective dwellings — but the MRE is available only for half the period, effectively reducing the exemption for each of you by 50%.
Can I put the capital gain into my spouse’s tax return because they don’t earn as much as me?
No. The amount of the capital gain, and any net rental income, is assessed in the tax return of the taxpayer(s) in alignment with their ownership interest(s) in the property. You cannot access your spouse’s or partner’s lower marginal tax rate by including the capital gain or income in their tax return if they do not hold an ownership interest in the property; and if they do, then only to the extent of that interest.
The ‘CGT event’ box on the tax return
Label 18 of the individual income tax return requires taxpayers to disclose if a CGT event has happened to them during the income year. The MRE exempts a property from CGT, not from reporting the CGT event. So even if the sale of your home is tax-free, you are still required to indicate that a CGT event has happened during the income year by reporting ‘Yes’ at this label.
Getting the timing right
Is the CGT payable when I sell the property?
Unlike stamp duty that is payable by the purchaser on settlement, CGT is not payable on settlement by the vendor. Further, CGT is not a separate tax. The net capital gain (after applying any CGT discount) is included in the vendor’s assessable income in working out their taxable income and taxed at their marginal tax rate. CGT is payable following lodgment of the tax return for the income year in which the contact was entered into, not the year of settlement.
Taxpayers can be easily confused because the MR days (and any pro-rating of days based on taxable use) are calculated based on the ownership period. The ownership period starts on the date of settlement on purchase and ends on the date of settlement on sale. It is not worked out by reference to the contract dates which are used to determine the income year in which the CGT event happens under CGT event A1.
Other issues
The list of MRE issues is endless, and brevity prevents us from considering any further aspects in detail, but the following matters warrant a passing mention:
- ‘Can I choose to disregard a capital loss on the sale of my home?’ — no, you cannot choose to disregard a capital loss on the sale of your home.
- Misconceptions with the ‘up to two-hectares’ adjacent land rule — it is important to understand when the MRE can be extended to apply to adjacent land.
- The MRE can be affected if you use part of your home to earn rental income or carry on a business from your home.
- Applying the MRE to chains of deceased estates is a particularly complex area and one that usually necessitates seeking professional tax advice. The two-year rule in section 118-195 of the ITAA 1997 which provides a partial or full exemption depends on a range of factors, including the date of death, date of acquisition and use of the dwelling by the deceased and their beneficiaries.
- The treatment of foreign residents, and the life events test. These rules are particularly draconian for Australian expatriates.
- Vendors, don’t forget to obtain a clearance certificate to avoid withholding by the purchaser at 15% of the value of the property under the Foreign resident capital gains withholding regime. These rules also apply to Australian resident taxpayers. From 1 January 2025, the withholding rate rose from 12.5% to 15% and the $750,000 threshold (below which these rules previously did not apply) has been removed.
Issues for practitioners
Australians have a grand propensity to widely and benevolently spread misinformation on the tax treatment of property at the ‘Friday night pub’ or the ‘Saturday barbecue’. Earnest advice is shared, often based on misconstrued hearsay, leading to a Monday morning telephone call from a client where you inevitably confirm that the sale of their home may not be in fact entirely free from tax.
Practitioners face considerable pressure to give their clients the answer they want to hear or be pressured into certain results or tax outcomes. This is a complex area of the law, and a quick question does not always mean a quick or simple answer. It is important to know the law and get the facts straight (particularly timelines and cost base information), so you can combat the hear sayers and ensure your clients get it right.
Given the information and digital capability for data-matching that is now available to the ATO, and the significant increases in property prices we’ve seen across the country over the past decade or two, you should expect the ATO to take a keen interest in this area.
