Understanding the Main Residence Exemption
What Happens When You Move Out?
The main residence exemption is one of the most valuable CGT concessions available to Australian homeowners. It allows you to disregard capital gains made on the sale of your home, provided it was your principal place of residence (PPR). But what happens when you move out and rent it out or leave it vacant?
🔍 How the Main Residence Exemption Works
Your home is generally exempt from CGT if it was your main residence throughout the ownership period. However, once you stop living in it, the exemption can still apply under two key scenarios:
Up to 6 years if the property is used to produce income (e.g., rented out). This is commonly referred to as the “6-year rule.”
Indefinitely if the property is not used to produce income (e.g., left vacant or used as a holiday home).
✅ Eligibility Criteria
To qualify for the exemption after moving out:
The property must have first been your main residence.
You must not treat any other property as your main residence during the same period (except for up to 6 months when transitioning between homes).
If the property is used to produce income, the exemption applies for up to 6 years per absence.
If the property is not used to produce income, the exemption can apply indefinitely.
🧾 Examples That Clarify the Rules
Example 1: Vacant Property – Unlimited Exemption
Bill lived in his unit for 3 years, then moved out and let his son live there rent-free. He didn’t treat any other property as his main residence durring this period. He sold the unit 12 years later and claimed the full priniciple place of residence CGT exemption.
Example 2: Rental Property – 6-Year Rule
Lisa lived in her home until 2014, then rented it out intermittently over the next 10 years, the total period the property was available for rent did not exceed 6 years. Because the rental periods didn’t exceed 6 years, she could treat the property as her main residence for the entire time and claim the full exemption. This example is an interaction between the 6 year rule and the rule applying to the property where is was vacant or was not used to ear income.
Example 3: Multiple Absences
Jez rented out his home for 5 years, moved back in for 2 years, then rented it again for 3 years. Each rental period was under 6 years and followed a period of using it as his PPR, so he could treat the property as his main residence for both absences and claim the full PPR exemption.
📉 What If You Exceed the 6-Year Limit?
If you rent out your former home for more than 6 years in a single absence, CGT will apply to the portion of the gain accrued after the 6-year limit.
You must:
Obtain a market valuation at the time you first used the property to produce income.
Calculate CGT based on the proportion of time the property was not covered by the exemption.
Example: Roya’s Apartment
Roya rented out her apartment (PPR) for 25 years after moving out. She could only treat it as her main residence for the first 6 years. She used the market value at the time she started renting the property out as the cost base and apportioned the calculated CGT on the remaining 19 years.
⚠️ Special Considerations
If you used part of your home to produce income while still living in it (e.g., place of business or rented part of your home out), that portion is not eligible for the PPR CGT exemption.
Foreign residents are generally not eligible for the main residence exemption when selling property in Australia.
🧮 Tax Return Reporting
When you sell a property and claim the main residence exemption, you must still report the CGT event in your tax return. If you’re eligible, you can claim the exemption and reduce or eliminate the capital gain.
📌 Final Thoughts
The main residence exemption is a powerful tool for homeowners, but it comes with strict rules and timelines. Understanding how the 6-year rule works and when to obtain a market valuation can help you avoid unexpected tax liabilities and make informed decisions about renting or selling your home.
If you are unsure if you qualify for the PPR CGT exemption or need assistance calculating or applying the exemption, give us a call.
