What’s the Main Residence Exemption?

Learn how the main residence exemption works for CGT in Australia, eligibility, partial exemptions, the six-year rule, ATO basics, and records you’ll need.

Property is a fickle beast when it comes to tax implications, and the most common question that arises is: what’s the difference between a main residence and an investment property for tax purposes? Understanding the main residence exemption from CGT (capital gains tax) can save you thousands when selling your home. The ATO’s main residence exemption rules determine whether you’ll pay tax on your property sale – or walk away with the full profit. Read on to learn how it works.

What Is a Main Residence Under ATO Rules?

It’s typically the dwelling where you and your family live, have personal belongings, receive mail, is addressed to your electoral roll and have basic utilities connected under your name. 

How Does the Main Residence Exemption for CGT Work?

The main residence exemption enables you to sell a property while being exempt from capital gains tax (CGT) on the profit from the sale. To be eligible for the main residence exemption, the following criteria must be met:

• You’re an Australian resident
• The dwelling:
  • Was a main residence
  • Has not been used to produce income. This means you haven’t rented the property for the entire time the property was owned by you, or you have not bought the property with the intention to ‘flip it’ and make a profit
  • Is on land 2 hectares or less

It’s important to note that if you did not move into the property and make it your main residence from the beginning of ownership, and it was originally used for income-producing purposes, then you cannot claim the main residence exemption for the period before it became your main residence.

CGT Main Residence Exemption: Quick Eligibility Checklist

To claim the main residence exemption from CGT, you’ll need to meet these ATO requirements:

• You’re an Australian resident for tax purposes 
• The property was your main residence (where you lived, received mail, stored personal belongings)
•  The dwelling was not used to produce income for the entire ownership period
• The land is 2 hectares or less
• You moved in and made it your main residence from the start of ownership (or accept partial exemption)

Important: The ATO’s main residence exemption doesn’t apply automatically. You need to ensure you meet all criteria before assuming you’re exempt from CGT when selling.

How does a property being owner-occupied versus being an investment property affect tax?

Owner-occupied property

A property being owner-occupied allows the taxpayer to claim the main residence exemption to avoid CGT on the profit of the sale. However, living expenses incurred while living in the property are not deductible on your tax return.

Investment property

A property being used to produce rental income is ineligible for the main residence exemptions, meaning that when the property is sold, CGT has to be paid on the profit of the sale. However, unlike an owner-occupied property, an investment property is required to be included in your income tax return. Your rental income must be declared, and expenses in relation to the rental property that were paid by you (not the tenant) can be claimed as a deduction. Some deductible expenses include council rates, repairs and maintenance, mortgage interest and asset depreciation. 

Main Residence CGT Exemption vs Investment Property CGT

Understanding the difference between a main residence and an investment property is crucial for CGT purposes:

The key difference: Your main residence is exempt from CGT under ATO rules, while investment properties are taxable when sold. However, investment properties allow you to claim deductions that main residences don’t.

What Happens to the Main Residence Exemption When You Rent Out Your Property?

Scenario 1: moved out of your old residence into a new residence

Your old residence and your new residence can both be considered a main residence for up to six months, which will enable you to use the main residence exemption and not pay CGT if the following conditions are met:

• You lived in your old residence for 3 months within the 12 months before you moved
• Your old residence was not used to produce income, such as rent for any part of those 12 months
• The new property becomes your main residence

Scenario 2: moved out of your old residence and producing rental income with no new residences (6-Year Rule)

The 6-Year Rule allows you to treat your former residence that is now being used to produce rental income as your main residence for as long as 6 years after you moved out. This is so long as you have not had another dwelling as your own main residence within that period.

ATO Main Residence Exemption Rules for Non-Residents

If you move overseas and keep your main residence in Australia, your eligibility for the main residence exemption depends on your tax residency status:

Australian resident for tax purposes: You can still claim the main residence exemption for CGT even while living overseas, provided you meet all other ATO requirements.

Non-resident for tax purposes: You cannot claim the ATO main residence exemption, even if you previously qualified or meet the 6-year rule requirements.

Critical dates to remember:

• From 1 July 2020: Non-residents cannot access the main residence exemption at all
• From 8 May 2012: The 50% CGT discount is not available for periods you were a non-resident

ATO Main Residence Exemption Rules for Non-Residents

If the above scenario applies to you, and you’re an Australian resident for tax purposes, you can still claim the main residence exemption. If you keep the residence and are no longer an Australian resident for tax purposes, you cannot claim the main residence CGT exemption. 

As of 1 July 2020, a non-resident of Australia for tax purposes cannot claim the main residence exemption even if the requirements mentioned earlier, such as the 6-Year Rule, are met. Partial exemptions to reduce CGT, such as the 50% CGT discount, will also not be available for the period an individual was a non-resident of Australia for tax purposes from 8 May 2012. This means the capital gain will need to be apportioned to find the amount available for the 50% CGT discount. The remaining capital gain will be assessable income and is taxed at the non-resident tax rate.

To access the main residence exemption once again, you must first become an Australian resident. Once you are again an Australian resident, the original requirements to access the main residence exemption apply.

For Example

1. If you were an Australian resident and you move overseas to become a foreign resident, selling the property prior to becoming a foreign resident will provide you with the best tax outcome. This is because you are entitled to the main residence exemption as well as the 50% CGT discount, as you are an Australian resident for tax purposes 
2. If you sell the property whilst a non-resident of Australia for tax purposes, you are subject to CGT as you will not be able to claim the main residence exemption and will have to proportion the 50% CGT discount for the period of time the property was owned as an Australian resident
3. If you were to move back to Australia and regain your Australian tax residency, you may claim the main residence exemption and the 50% CGT discount

What do you need to do when it comes to taxes and property?

• Understand which property is being used as your current main residence
• The details on whether the property was used for income-producing purposes
• Provide contracts of the purchase and sale of the property
• Be aware of the following dates:
  • Date purchased and sold
  • Date moved in and moved out of your old and new properties
  • Date property started and ended being used for income-producing purposes

FAQs: Main Residence Exemption and CGT

What is the main residence exemption for CGT?

The main residence exemption for CGT (capital gains tax) allows Australian residents to sell their home without paying tax on the profit. Under ATO rules, if a property has been your main residence for the entire period you owned it, and wasn’t used to produce income (like rental), you can claim full exemption from CGT when you sell. This exemption can save you tens of thousands of dollars in tax, as you keep 100% of any capital gain instead of paying CGT at your marginal tax rate.

How do I know if my property qualifies as a main residence under ATO rules?

According to the ATO, a main residence is where you and your family live, have your personal belongings, receive mail, are registered on the electoral roll, and have utilities connected in your name. It’s not just about ownership – it’s about genuine occupancy. The property must be on land of 2 hectares or less, you must be an Australian tax resident, and it cannot have been used to produce income for the entire ownership period. The ATO’s main residence exemption requires you to have actually lived in the property, not just owned it.

Can non-residents claim the main residence exemption from the ATO?

No. As of 1 July 2020, non-residents cannot claim the ATO main residence exemption, even if they meet all other eligibility requirements like the 6-year rule. If you move overseas and become a non-resident for tax purposes, you’ll lose access to the main residence CGT exemption. Additionally, from 8 May 2012, non-residents cannot access the 50% CGT discount for periods when they were non-residents. If you’re planning to move overseas, it’s often best to sell your property before your tax residency changes, or accept that you’ll pay CGT when you eventually sell.

What is the 6-year rule for the main residence exemption?

The 6-year rule allows you to treat your former main residence as your main residence for CGT purposes for up to 6 years after you move out, even if you’re earning rental income from it. This means you can rent out your home for up to 6 years and still claim the main residence exemption from CGT when you sell – as long as you don’t establish another main residence during that time. This rule is particularly valuable for people who relocate for work or travel but want to keep their property and rent it out temporarily without losing the CGT exemption.

How does the main residence exemption work if I rent out my property?

If you rent out your property after living in it as your main residence, you have two CGT exemption options depending on your situation. Option 1: If you move to a new main residence, both properties can be treated as your main residence for up to 6 months, avoiding CGT on your old property (provided you lived there for at least 3 months in the 12 months before moving and didn’t rent it during those 12 months). Option 2: If you don’t establish a new main residence, the 6-year rule applies – you can claim the main residence exemption for CGT for up to 6 years while renting it out.

Do I have to tell the ATO if I’m claiming the main residence exemption?

Generally, you don’t need to report the sale of your main residence if you’re claiming the full main residence exemption and the property was your main residence for the entire ownership period. However, you must notify the ATO if you’re claiming a partial exemption (because the property was partly rented or wasn’t your main residence for the full ownership period), if you used part of the property to produce income, or if you’re a foreign resident. When in doubt, include details in your tax return or consult with an accountant to ensure ATO compliance with main residence exemption rules.

What’s the difference between a main residence and an investment property for CGT?

The difference comes down to CGT exemption eligibility. A main residence is exempt from CGT under ATO rules when you sell it, meaning you keep 100% of any profit. An investment property is not exempt from CGT – you’ll pay tax on the capital gain (though you may get a 50% CGT discount if you held it for more than 12 months). The trade-off is that investment properties allow you to claim deductions for expenses like interest, repairs, and rates, while main residences don’t offer these deductions. You can’t have both benefits – either it’s your tax-free main residence, or it’s a rental property with deductible expenses.

Can I claim the main residence exemption if I bought the property as an investment first?

Partially, but not for the entire ownership period. If you initially bought a property as an investment and rented it out, then later moved in and made it your main residence, you can only claim the main residence exemption for CGT for the period it was actually your main residence. The ATO will calculate a partial exemption based on how long the property was your main residence versus an investment property. This means you’ll pay CGT on the portion of the capital gain that relates to the investment period, but the gain attributable to your main residence period will be CGT-free.

What happens to the main residence exemption if I have a property on more than 2 hectares?

If your property is on land larger than 2 hectares, you can still claim the main residence exemption, but only for the dwelling and up to 2 hectares of land immediately surrounding it. The ATO will require you to pay CGT on any capital gain relating to the excess land above 2 hectares. However, you may be able to claim the full exemption for land over 2 hectares if you can demonstrate the additional land was necessary for the reasonable enjoyment of the dwelling – for example, if the property is on a steep slope or has other geographical features that make the extra land essential.

What records do I need to keep for the ATO main residence exemption?

To support your main residence exemption claim, keep these ATO-required records: contracts for both purchase and sale of the property, dates you moved in and moved out, records of when the property started and stopped being used for income-producing purposes (rental agreements if applicable), utility bills and correspondence showing the address as your residence, electoral roll registration details, and evidence of where you lived if claiming exemption for multiple properties. The ATO can request this documentation for up to 5 years after you lodge your tax return, so maintain thorough records of your main residence status throughout ownership.

If you need a hand with the tax obligations of your property situation, get in touch.