Buying a home in Australia is often the biggest purchase you’ll make, and the tax treatment when you sell it can feel like a separate maze. The main residence exemption means most owner-occupiers pay zero capital gains tax on their home — but the rules around what counts as your main residence, how long you can rent it out, and what happens after 2027 are worth understanding before you buy, not on sale day.
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This article is general information only and does not constitute professional advice. For your specific situation, consult a qualified professional.
Capital gains tax isn’t a separate tax — it’s added to your income and taxed at your marginal rate. That means a big gain can push you into a higher bracket in the year you sell. The main residence exemption is the most powerful tool for home buyers, but it has limits. And if you ever rent out your home, the 6-year rule can keep the exemption alive. Here’s what you actually need to know.
What the Main Residence Exemption Actually Covers
The term you’ll hear most often is the main residence exemption. It’s the reason most home sellers never pay CGT. But the ATO has specific conditions: you must be an Australian resident, the dwelling must have been your home (and your family’s home) for the whole ownership period, and it must not have been used to produce income. What I tend to notice is that people assume the exemption is automatic — it’s not. If you rented out a room or ran a business from home, you may only get a partial exemption, apportioned by floor area and time. For a deeper look at how property ownership structures work, check out understanding property co-ownership agreements.
The Full Cost Picture: What Counts Toward Your Cost Base
When you sell a property that isn’t fully exempt, the tax is calculated on the difference between the sale price and your cost base. The cost base isn’t just what you paid — it includes everything you spent to buy, improve, and sell the property. The higher your cost base, the smaller your taxable gain. And the ATO is strict about what counts.
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| Cost base element | What it includes | Can it be claimed twice? |
|---|---|---|
| Purchase price | Money or property given for the asset | No — single use only |
| Incidental costs | Stamp duty, agent fees, legal and conveyancing fees | No — single use only |
| Ownership costs | Costs of owning the asset (e.g. interest on borrowings for investment properties) | No — cannot be claimed if already deducted as a tax expense |
| Capital improvements | Renovations, extensions, structural improvements that add or preserve value | No — single use only |
| Title preservation costs | Costs of preserving or defending the title | No — single use only |
Say you buy an investment property for $500,000, pay $20,000 in stamp duty and $10,000 in legal fees, then spend $30,000 on a kitchen renovation. Your cost base is $560,000, not $500,000. If you sell for $600,000, the gain is $40,000, not $100,000. The 50% discount cuts that to $20,000 — but only if you’ve held it over 12 months. That single renovation can save you thousands in tax. If you’re unsure about what counts as a capital improvement, a tax and finance specialist on JustAnswer can help clarify what to track.
Three Mistakes That Cost Home Sellers Thousands in CGT
Missing the 6-year rule limit
The most common error I see is people renting out a former home for more than 6 years and assuming the exemption still applies. It doesn’t. Once the 6-year income-producing period runs out, the excess time is apportioned for CGT. If you rented for 8 years, the first 6 may be exempt, but the remaining 2 years of gain are taxable. The fix: move back in before the 6 years are up to reset the clock, or sell before the limit expires.
Not tracking the cost base from day one
Many sellers lose thousands because they can’t prove what they spent on improvements. The ATO requires records of every capital improvement, not just big ones. A $5,000 landscaping job, a $2,000 fence replacement, and a $1,500 plumbing upgrade all add up. Without invoices, you can’t include them. What I’d do: keep a property file from the day you buy, with every receipt for work done. If you’re already in a mess, a JustAnswer legal professional can advise on what documentation might still be acceptable.
Assuming the 50% discount applies to everyone
Foreign and temporary residents cannot claim the 50% discount for gains after 8 May 2012. And since 1 July 2020, foreign residents can’t claim the main residence exemption at all, except for limited life events. If you move overseas and sell your Australian home, your residency status at the time of sale determines the outcome. Check your tax residency with a professional before you sign the contract.
Forgetting the 2-hectare land limit
The main residence exemption covers the house and up to 2 hectares of land. If you own a larger block, the excess land is apportioned for CGT. This catches people on acreage who assume the whole property is exempt. The ATO apportions the gain based on the proportion of land that exceeds 2 hectares, so you may owe tax on part of the sale even if you lived there the whole time.
How the Exemptions Work in Practice — and What Changes in 2027
Qualifying for the main residence exemption
To claim the full exemption, the property must have been your main home for the entire ownership period. The ATO looks at where you lived, where your belongings were, where you received mail, and where you were registered to vote. If you moved out and rented the property, the 6-year rule can keep the exemption alive — but only if you don’t claim another property as your main residence during that period. The CGT event happens on the contract signing date, not settlement, so the financial year of the sale is determined by when you signed, not when you got the money.
How the 6-year rule works step by step
- 1Live in the property firstThe property must have been your main residence before you rent it out. A property rented from day one cannot use the 6-year rule.
- 2Move out and start rentingThe 6-year clock starts when the property begins producing income. Each absence has its own 6-year window.
- 3Track the 6-year limitIf the property is rented for more than 6 continuous years, the excess gain is apportioned and taxable. You can reset the clock by moving back in.
- 4Sell or reoccupy before the limitIf you sell within the 6-year window, the entire gain may be exempt. If you reoccupy, the clock resets for future absences.
What the 2027 reform changes
From 1 July 2027, the 50% CGT discount for individuals, trusts, and partnerships is replaced with cost-base indexation and a 30% minimum tax on the real (inflation-adjusted) gain. Properties held at 7:30pm AEST on 12 May 2026 are grandfathered — gains accrued before 1 July 2027 still get the 50% discount. For new residential builds purchased after the Budget, investors can choose between the old 50% discount or the new indexation-plus-30% arrangement when they sell. The table below shows the key differences.
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| Feature | Current rules (until 30 June 2027) | New rules (from 1 July 2027) |
|---|---|---|
| Discount for individuals | 50% discount after 12 months holding | Cost-base indexation + 30% minimum tax on real gain |
| Who can use it | Individuals, trusts, partnerships (not companies) | Same, but with indexation and 30% floor |
| New builds | 50% discount applies | Investor can elect between old 50% discount or new indexation + 30% floor |
| Grandfathering | Not applicable | Gains accrued before 1 July 2027 keep the 50% discount |
| Negative gearing | Unlimited offset against other income | Limited to rental income or future capital gains for established properties bought after Budget |
Small business concessions and other exemptions
Small business CGT concessions are unaffected by the 2027 reform. If you use part of your property as your principal place of business, you may qualify for active asset treatment — which can reduce CGT liability to zero. This is separate from the main residence exemption and can be a powerful tool for business owners who sell their property. For more on how property transactions work in practice, see understanding property deed transfer when buying a house.
Frequently Asked Questions About CGT on Australian Property
Can I claim the main residence exemption if I rent out one room? ▾
What happens if I sell after renting for 8 years? ▾
Does the 2027 reform affect my main residence exemption? ▾
Can I claim two properties as my main residence at the same time? ▾
What records should I keep for CGT purposes? ▾
Do I pay CGT if I sell my home and buy a cheaper one? ▾
The 2027 Reform Doesn’t Change What Matters Most for Home Buyers
The May 2026 Budget changes are significant for property investors, but for home buyers who live in their property, the main residence exemption remains untouched. The 6-year rule still applies, the 2-hectare limit still stands, and the cost base still matters. What the reform does change is the calculus for anyone who might rent out their home long-term — the 50% discount disappears after 1 July 2027, so selling before that date could save thousands if you’re holding an investment property.
Remember: this article is general information only. For advice on your specific situation, speak to a qualified professional.
If this was useful, you might also want to read First Home Guarantee Scheme — is it worth it? Australian home buyers discuss.
Sources and Further Reading
Understanding subdivision land value adjustments when buying your home — A practical guide to how land value affects your purchase and future tax position.
Tips for assessing residential areas when buying a house — How location choices affect long-term value and resale outcomes.
Australian Taxation Office (n.d.). Capital gains tax (overview). 🔗
Australian Taxation Office (n.d.). Eligibility for main residence exemption. 🔗
Australian Taxation Office (n.d.). Treating a former home as your main residence (6-year rule). 🔗
MPFG (2026). Australian Capital Gains Tax (CGT) Explained: 50% Discount, Main Residence Exemption, the 6-Year Rule & the 2027 Reform. 🔗
