The 6-Year Rule vs. Other CGT Exemptions: What Australian Homeowners Need to Know

How the Full Main Residence Exemption Works

If your property was your main residence for the entire time, you owned it, you can claim the full main residence exemption. This means you won’t have to pay CGT on any capital gain when you sell. You also don’t have to report a capital gain or loss in your annual income tax return for that property.

To qualify for the full main residence exemption, you must:

• Be an Australian tax resident.

• Have lived in the property as your main residence for the whole ownership period.

• Not have used the property to produce income (such as renting it out).

• Not have bought the property with the intention to renovate and sell for profit.

If you meet all these conditions, you can avoid capital gains tax completely on your main residence.

When Only a Partial Main Residence Exemption Applies

Sometimes, you only qualify for a partial main residence exemption. This happens if:

• The property was your main residence for only part of the ownership period.

• You used the property to produce income (for example, as a rental property) for part of the time you owned it.

• You had more than one property and claimed two primary residences for the same period.

In these cases, you’ll need to calculate how much CGT is payable based on the time and portion of the property that was not your main residence. The ATO uses a formula to work out your net capital gain for CGT purposes, taking into account the original purchase price, adding eligible expenses (like legal fees and improvements), and the market value at the time of any change in use.

The 6 Year Rule: Flexibility When Life Changes

Life can take you in different directions, and sometimes you need to move out of your main residence. The 6-year rule (sometimes called the six-year absence rule) is designed to help property owners who move out but want to keep their CGT main residence exemption.

How the 6 Year Rule Works

If you move out of your main residence and start to produce income from it (for example, by renting it out), you can still treat the property as your main residence for CGT purposes for up to six years. This means you can avoid capital gains tax on the property for a six-year period, even while it’s a rental property.

Here’s how it works:

• You move out of your main residence and rent it out.

• For up to six years after you move out, you can continue to claim the main residence exemption for CGT purposes.

• If you move back in, the six-year period resets. You can then move out again and start another six-year absence period.

• If the property is not used to produce income while you’re away (for example, it’s left vacant or used as a holiday home), you can treat it as your main residence indefinitely.

The six-year rule is especially helpful if you need to move for work, family, or other reasons but don’t want to sell your former home right away.

Multiple Absences and Resetting the 6 Year Rule

If you move back into your property after renting it out, the six-year rule can start again the next time you move out. For example, if you rent out your former home for five years, move back in for a year, and then rent it out again, you can claim another six year CGT exemption for the new rental period.

This flexibility allows property owners to manage their property investment and avoid capital gains tax for longer, as long as they don’t exceed six years of rental income in each absence period.

Unlimited Exemption for Non-Income Periods

If you move out of your main residence but don’t use it to produce income, you can treat it as your main residence indefinitely. This means there’s no time limit as long as you don’t claim another property as your main residence for the same period.

For example, if you move overseas and leave your home vacant, you can keep your main residence exemption for as long as you own the property, provided you don’t start renting it out or claim another main residence exemption elsewhere.

Comparing the 6 Year Rule to Other CGT Exemptions

The 6 year rule is just one way to reduce or avoid capital gains tax. Understanding how it compares to other capital gains tax exemptions can help you choose the best option for your situation.

The 50% CGT Discount

If you own a property for more than 12 months before a CGT event (such as selling the property), you may be eligible for a 50% CGT discount. This means you only pay CGT on half of your capital gain. The discount applies to both investment property and former main residences that don’t qualify for the full main residence exemption.

To qualify:

• You must be an Australian tax resident.

• The property must have been held for at least 12 months before the CGT event.

The 50% discount is especially useful if you’ve exceeded the six year period or never lived in the property as your main residence.

Small Business CGT Concessions

Some property owners may qualify for small business CGT concessions if the property is used in a business and meets certain criteria. These concessions can include:

• The 15-year exemption (no CGT payable if you’ve owned the property for at least 15 years and are retiring).

• The 50% active asset reduction.

• The retirement exemption (up to a certain amount can be contributed to superannuation tax-free).

• The rollover concession (deferring CGT to a later time).

These concessions are generally not available for standard residential rental properties, but they can apply to commercial properties or properties used in a business.

Pre-CGT Asset Exemption

If you acquired your property before 20 September 1985, it is considered a pre-CGT asset and is completely exempt from capital gains tax. If you inherited a pre-CGT property, you may also benefit from this exemption, depending on your situation.

To avoid costly ATO penalties and errors with small business Capital Gains Tax, read our article on Small Business CGT Mistakes.

When to Use the 6 Year Rule or Other Exemptions

Choosing the right exemption depends on your circumstances, how you’ve used your property, and your long-term plans.

When the 6 Year Rule is Most Useful

The 6-year rule is ideal if you:

• Need to move out of your main residence for work, family, or other reasons.

• Want to rent out your former home and generate rental income, but plan to return or sell within six years.

• Are unsure about your long-term plans and want to keep your CGT exemption options open.

This rule is especially valuable in areas where property values are rising, as it can help you avoid paying CGT on a large capital gain.

When Other Exemptions Are Better

Other capital gains tax exemptions may be better if:

• You’ve never lived in the property as your main residence (the 50% CGT discount may be your best option).

• Your property is used in a business and qualifies for small business CGT concessions.

• Your property is a pre-CGT asset.

• You have more than one property and need to decide which property to treat as your main residence for CGT purposes.

Timing and Strategy

The timing of your property sale can have a big impact on how much CGT you pay. Selling within the six year absence period can help you avoid CGT, while selling after this period may mean you need to pay CGT on part of your capital gain.

If you’re approaching the end of your six year rule, moving back into your property for a period (even up to six months) can reset the rule and give you another six year cgt exemption period. This can be a smart strategy for property investors who want to maximise their exemptions and save money.