2026 Budget Main Residence Exemption: Expat Tax Guide

Own (or ever owned) an Australian property that was once home? Spent time overseas? Then sit down, because the 2026 Budget main residence exemption changes (and how they interact with rules already on the books) are about to become the most expensive area of tax law you’ve probably never had to think about. Until now.

We’ll walk through how the main residence exemption actually works for Australian expats. Why the 2019 foreign resident denial rules are arguably the most punitive piece of tax legislation passed this century. What the 6-year absence rule does, and doesn’t, do. And how all of this layers on top of the 1 July 2027 CGT changes announced in the 2026-27 Federal Budget.

Then five real-world scenarios. Full numbers. Two involving overseas property (one UK, one US).

If you haven’t already, read our recent article on the 2026 Budget tax changes for Australian expats first. This one picks up where that one left off.

Table of Contents

1. Our Honest Take Before We Start
2. The Main Residence Exemption: A 60-Second Recap
3. The 6-Year Temporary Absence Rule (Section 118-145)
4. The ‘First Used to Produce Income’ Reset (Section 118-192)
5. The 2019 Foreign Resident Denial Rules (Section 118-110(3), (4) and (5))
6. How the 2026-2027 Federal Budget Main Residence Exemption Changes Layer On Top
7. Worked Example 1: The Tenanted-Over-6-Years Returnee (Mia, Sydney apartment)
8. Worked Example 2: The Tenanted Returnee Who Bought a New Main Residence (Tom, Brisbane house)
9. Worked Example 3: The Non-Resident Sale (The Brutal One)
10. Worked Example 4: The UK Investment Property (Sarah, Manchester flat)
11. Worked Example 5: The US Main Residence Sold After Return (James, Boston house)
12. Main Residence Exemption Planning Levers for Australian Expats
13. The ‘New Build’ Wrinkle for Former Main Residences
14. The Quiet Question We Now Get Every Week
15. Right, So What Now?
16. Important Notes

Writing pad, pen, ridiculously strong coffee. Let’s go.

Our Honest Take Before We Start

Look, we have to say something before we walk you through the detail.

The Government has dressed this Budget up as a fix for the intergenerational property crisis. The idea, at least the one being sold to voters, is that wealthy investors have been pulling up the ladder behind them, and the Budget is here to lower it back down.

Here’s what we actually think.

The Budget won’t solve the intergenerational property crisis. We think it will make it worse.

The negative gearing changes lock the next generation out of a wealth-building tool that the current generation used freely. Existing investors keep their grandfathered properties. Younger Australians starting today get the version with the safety net removed. That’s not lowering the ladder. That’s sawing off the bottom three rungs.

The CGT changes don’t just hit property investors. They hit the 22-year-old with a part-time job and $4,000 in an ETF. They hit the self-funded retiree with a small share portfolio supplementing the pension. They hit the family running a small business through a trust, distributing $20,000 a year to a non-working spouse to actually feed the kids. In each case, the new minimum 30% tax replaces the marginal-rate-and-CGT-discount calculation that previously gave those people a fair shake. And those are the people the Budget says it isn’t aiming at.

If you genuinely wanted to solve the intergenerational property crisis, you wouldn’t simultaneously tax the savings vehicles that young people use to build a deposit. Shares. ETFs. Crypto. Managed funds. All of them now sit in a tougher regime than they did under the old 50% discount. That makes the deposit harder to build, not easier.

The small business and trust measures are likely to do real damage to families who don’t look anything like the targets in the policy speech.

The other thing we’re watching, with some concern, is what this does to entrepreneurs and innovators. If you’re a software founder, a creator, a small business owner planning to build something serious, the after-tax case for staying in Australia just got weaker. Singapore. Hong Kong. The UAE. Various other territorial-tax jurisdictions. They were already attractive. They just became more attractive.

We’re not saying that as a sales pitch, although the irony isn’t lost on us. Our most popular service, by some distance, is already the Outbound Expat Tax Consultation. Australians leaving Australia. Breaking residency. Moving to lower-tax jurisdictions. We were running those before the Budget. We expect to be running a lot more of them now.

What we’re saying is that, on our reading, this Budget does the opposite of what it claims. It’s going to push savers, retirees, small business families and entrepreneurs into worse outcomes, while leaving the existing structural problems in the property market largely untouched.

Right. That’s our honest take. Now let us walk you through what actually changed for the main residence exemption, what it means for you specifically, and what you can do about it.

The Main Residence Exemption: A 60-Second Recap

Under section 118-110 of Income Tax Assessment Act 1997 (ITAA 1997), if you sell a property that’s been your main residence for the entire ownership period, the capital gain is disregarded. No tax. Zero. The most valuable tax exemption available to most Australians.

Three conditions for the full exemption: you owned it as an individual, it was your main residence throughout your ownership period, and the interest didn’t pass to you as a beneficiary of a deceased estate.

Sounds simple, doesn’t it? It isn’t.

The exemption gets complicated the moment life happens. You move out. You rent the place. You buy somewhere else. You move overseas. You come back.

Each move triggers rules that either preserve, reduce, or annihilate your exemption. And the 2019 changes added a brand new way to lose it entirely if you happen to be a foreign resident at the wrong moment.

The 6-Year Temporary Absence Rule (Section 118-145)

This is the rule that lets you have a life without necessarily tying you to your property.

Section 118-145 lets you treat a dwelling as your main residence even after you’ve packed up and left, subject to two conditions.

If the dwelling is not used to produce income while you’re away (it sits vacant, you stay there occasionally, the cat lives there), you can treat it as your main residence indefinitely. No time limit.

If the dwelling is used to produce income (you rent it out), you can continue to treat the property as your main residence for up to 6 years of your temporary absence. After that, the exemption stops applying to the income-producing period beyond 6 years.

Here’s the kicker. The 6 years isn’t a lifetime cap. Move back in, re-establish the dwelling as your main residence, and the clock resets. Leave again, rent it out for another 6 years, and the new absence period gets a fresh 6-year window. There’s no statutory limit on how many times you can do this. Note: ATO guidance states that you need to live in your property for at least 6-months to establish or re-establish the property as your main residence (although this is not stated anywhere in Australia’s statutory taxation law).

One catch. You can only have one main residence at a time (with a 6-month overlap under section 118-140 when changing main residences). So if you’ve used the absence rule to keep your old place as your main residence, anywhere else you live during that period is not your main residence for tax purposes. Pick one.

And one more thing. This is a choice, not a default. You elect to apply section 118-145, typically when you lodge the tax return for the year you sell.

The ‘First Used to Produce Income’ Reset (Section 118-192)

This one is criminally underused (largely because the rule is not widely known), and for Australian expats it’s often worth tens of thousands of dollars in tax saved. Quietly. Compulsorily. Whether you’ve heard of it or not.

Section 118-192 says: if you’d only get a partial main residence exemption (because the dwelling was used to produce income at some point), and the income-producing use first occurred after 7.30pm ACT time on 20 August 1996, and you would have got a full exemption if you’d sold just before that first income-producing use, then you’re deemed to have acquired the dwelling at its market value at that ‘income time’.

Translation: when your main residence first becomes income-producing, the cost base resets to market value at that moment. The years of growth before then? Gone from the calculation.

For most expats, this matters enormously. Your Australian home was your main residence for years, possibly decades, before you went overseas. During those years it appreciated. By the time you finally moved overseas and rented it out, the value might already have grown from $400,000 to $1.2 million. Section 118-192 resets the cost base to $1.2 million at the date of first income production. The pre-rental growth from $400,000 to $1.2 million is effectively wiped from the CGT calculation. Only growth from $1.2 million onwards matters.

Two critical features.

First, the rule is compulsory, not optional. If conditions are met, the reset happens whether you want it to or not.

Second, it generally applies where the dwelling is first used to produce assessable income after 7.30pm ACT time on 20 August 1996. Special transitional rules can apply for dwellings acquired before that time, under section 118-195 of the Income Tax (Transitional Provisions) Act 1997.

Two more conditions. You must actually get only a partial exemption (so the rule won’t apply if you’re fully exempt for some other reason). And you must have been entitled to a full main residence exemption just before the first income-producing use.

Most expats who lived in their property as their genuine main residence right up until going overseas meet this test, provided they didn’t have another main residence at the time.

The 2019 Foreign Resident Denial Rules (Section 118-110(3), (4) and (5))

Now we come to the brutal part.

Before 9 May 2017, foreign residents could access the main residence exemption on the same basis as Australian residents. Then the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Act 2019 turned up. It inserted subsections (3), (4) and (5) into section 118-110, and it changed the game for anyone holding a former Australian main residence while living overseas.

The combined effect is brutal in three ways.

First: if you’re an ‘excluded foreign resident’ (see below) at the time of the CGT event, the main residence exemption is denied entirely. Not partially. Not for the years you actually lived there. Entirely. The whole capital gain, from the day you bought the property, becomes assessable. Doesn’t matter how many years you spent in it as your genuine main residence before going overseas.

Second: ‘excluded foreign resident’ captures anyone who has been a foreign resident continuously for more than 6 years at the time of the CGT event. If you’ve been a non-resident for greater than six years, and then you sell your main residence in Australia. You lose the exemption. Entirely.

Third: even if you’ve been a foreign resident for 6 years or less, the exemption is still denied unless you satisfy the ‘life events test’ in subsection 118-110(5). This requires

(a) the continuous period of foreign residency at the CGT event time was 6 years or less, AND

(b) one of the following occurred during your foreign residency: a terminal medical condition of you, your spouse, or your child under 18; death of your spouse or your child under 18; or certain family law events involving you and your spouse or former spouse.

Read those triggers again. Narrow. They require something genuinely difficult to have happened during your time overseas. Not ‘I moved back for unrelated reasons before selling’.

Transitional provisions in section 118-110(1) of the Income Tax (Transitional Provisions) Act 1997 allowed properties held at 7.30pm AEST on 9 May 2017 to be sold under the old rules until 30 June 2020. That window has closed. Any disposal after 30 June 2020 by a foreign resident is fully subject to the new rules.

There is no general Commissioner’s discretion in the legislation to ignore the foreign resident denial rule just because the outcome is harsh. Unfortunately, the law applies as written and the Tax Commissioner has no choice or discretion to ignore that.

How the 2026 Budget Main Residence Exemption Changes Layer On Top

Now we add the announced 1 July 2027 CGT regime to the mix. Things get fun.

Recap (subject to legislation being enacted substantially as announced). On 1 July 2027, the 50% CGT discount is proposed to be replaced for individuals, partnerships, and trusts by CPI-based indexation of cost base plus a 30% minimum tax rate on real capital gains. For assets held before 1 July 2027 and sold after, the gain is expected to be split. The pre-2027 portion gets the (potentially apportioned) 50% discount. The post-2027 portion gets indexation plus the 30% minimum tax.

While we’re here, a quick observation. The 50% CGT discount was introduced in 1999 to replace the old indexation system that ran from 1985 to 1999. The Government has now decided to bring back the indexation system, plus add a minimum 30% tax rate, plus apply both to assets the old indexation system never touched in the same way.

If that feels like the Government has spent 25 years convincing Australians to invest in long-term assets under one set of rules and is now rewriting those rules on everyone with the patience to have actually held something, you’re not imagining it.

The main residence exemption rules apply first. They determine what portion (if any) of your capital gain is assessable. Whatever remains then enters the CGT calculation and is split between pre-2027 and post-2027.

A full main residence exemption means no assessable gain, so the proposed changes are irrelevant. Done. A partial exemption that leaves (say) 30% of the gain assessable has that 30% slice split between pre-2027 and post-2027. A complete denial under the 2019 rules means the entire gain enters the split.

For long-held properties owned by non-residents who’ve lost the main residence exemption, the layering is genuinely punishing. The full pre-2027 gain gets a reduced 50% discount (Subdivision 115-B foreign resident apportionment, since May 2012). The full post-2027 gain gets indexation plus 30% minimum tax (assuming enactment as proposed).

An Important Caveat on Section 118-192 and the 2027 Changes

Here’s where we need to flag a genuine uncertainty.

Section 118-192 creates a cost base reset at the ‘income time’. The new 1 July 2027 changes also involve a cost base reset (or apportionment) at 1 July 2027 for assets held continuously through that date. Two resets. Same property.

In principle, these two resets should operate sequentially. Section 118-192 first determines the cost base at the income time. The 1 July 2027 transitional rules then determine how the post-income-time gain is split between pre-2027 and post-2027 portions.

That’s how we expect it to work. But until the draft legislation is released, we can’t be 100% certain. The legislation could treat the section 118-192 reset differently, or introduce interactions we haven’t anticipated. Treat the worked examples below as our best understanding, not as confirmed law.

Worked Example 1: The Tenanted-Over-6-Years Returnee

Meet Mia.

Mia bought her Sydney apartment in March 2010 for $600,000 (including stamp duty and legal costs). She lived in it as her main residence until July 2016, when Hong Kong came calling and she packed her bags. She rented the apartment out from August 2016 onwards.

Mia returned to Australia and re-established Australian tax residency in February 2024. She didn’t move back into the Sydney apartment (a new job in Melbourne kept her closer to that). She kept the Sydney property tenanted.

In September 2030, Mia decides to sell the Sydney apartment for $1,600,000. Good outcome on the property. The CGT bill is what we need to work out.

Walking Through Mia’s Calculation

Section 118-192 reset: In August 2016, the apartment first produced income, having been Mia’s main residence until then. All conditions for the cost base reset are met. Market value at August 2016: $950,000. This becomes Mia’s deemed cost base. The pre-rental appreciation from $600,000 to $950,000 is permanently outside the Australian CGT system.

Section 118-145 absence rule: Mia elects to apply section 118-145. Her absence period August 2016 to September 2030 is 14 years, but only the first 6 years (August 2016 to August 2022) qualify under the income-producing limit. Mia is an Australian tax resident when she sells, so the 2019 foreign resident denial rules don’t apply.

Partial exemption: deemed ownership period 5,145 days. Days covered as main residence (the 6 years of absence): 2,191. Days not covered: 2,954. Assessable proportion: 57.41%.

Gross gain: $1,600,000 less $950,000 less $30,000 selling costs = $620,000. Assessable portion: $355,942.

1 July 2027 transitional split: Mia obtained a professional valuation at 1 July 2027 showing $1,400,000. Pre-2027 gross gain: $450,000. Post-2027 gross gain: $170,000. After applying the 57.41% assessable proportion: pre-2027 assessable $258,345, post-2027 assessable $97,597.

s115-115 hiccup: Mia was a foreign resident from August 2016 (her section 118-192 deemed acquisition date) to February 2024 (her return), and Australian resident from February 2024 to September 2030. Under section 115-115 of ITAA 1997, the 50% CGT discount is apportioned where the taxpayer was a foreign resident during any part of the discount testing period after 8 May 2012. Mia’s apportioned discount = Australian resident days / (2 × total DTP days) = 2,404 / (2 × 5,145) = approximately 23%.

Pre-2027 with apportioned discount of 23%: $258,345 x (1 – 0.23) = approximately $198,925 taxable.

Post-2027 with indexation: 2027 cost base of $1,400,000 indexed by approximately 8% (July 2027 to September 2030 inflation) = $1,512,000. Real post-2027 gain (gross) approximately $58,000, or $33,300 after the 57.41% assessable proportion.

Mia’s total assessable capital gain: approximately $232,200.

If the entire transaction had occurred before 1 July 2027 under the current rules (apportioned discount applying), her total assessable gain would have been $355,942 x (1 – 0.23) ≈ $274,100. The new rules produce a marginally better outcome for Mia in this scenario, primarily because post-2027 indexation substantially erodes that portion of the gain.

Worked Example 2: The Tenanted Returnee Who Bought a New Main Residence

Meet Tom.

Tom bought his Brisbane house in June 2008 for $480,000. He lived in it as his main residence until April 2013, when he moved to Singapore. He rented the Brisbane house out from May 2013.

Tom returned to Australia in March 2020 and bought a new house in Melbourne to live in. He moved straight into the Melbourne house and established it as his main residence from that date. He kept the Brisbane house tenanted (didn’t move back into it).

In November 2028, Tom sells the Brisbane house for $1,250,000.

The wrinkle: from March 2020 onwards, Tom’s main residence is unambiguously the Melbourne house. He cannot use the section 118-145 absence rule to treat the Brisbane house as his main residence from March 2020 onwards (the ‘only one main residence at a time’ rule). So for Tom, the Brisbane house can be treated as his main residence only for the absence period from May 2013 to March 2020, and even this is constrained by the 6-year cap.

Walking Through Tom’s Calculation

Section 118-192 reset: Tom’s Brisbane house first produced income in May 2013, having been his main residence until then. Reset applies. Market value at May 2013: $620,000. This becomes Tom’s deemed cost base.

Section 118-145 absence rule: Tom can elect to treat the Brisbane house as his main residence from May 2013 to April 2019 (the 6-year cap). From May 2019 onwards, the absence rule no longer covers this property.

Deemed ownership period: 5,663 days. Days covered: 2,191. Days not covered: 3,472. Assessable proportion: 61.31%.

Gross gain: $1,250,000 less $620,000 less $25,000 selling costs = $605,000. Assessable portion: $370,946.

1 July 2027 split (Tom got a valuation showing $1,150,000): Pre-2027 gross gain $530,000. Post-2027 gross gain $75,000. Apply 61.31%: Pre-2027 assessable $324,943, post-2027 assessable $45,983.

Same s115-115 hiccup as Mia. Tom was foreign resident from May 2013 to March 2020 (during his DTP starting at section 118-192 income time) and Australian resident from March 2020 to November 2028. Apportioned discount: 3,167 / (2 × 5,663) = approximately 28%.

Pre-2027 with apportioned discount of 28%: $324,943 x (1 – 0.28) = approximately $233,959 taxable.

Post-2027 with indexation: 2027 cost base of $1,150,000 indexed by approximately 3.5% inflation (July 2027 to November 2028) = $1,190,250. Real post-2027 gain (gross) approximately $35,000, or $21,300 after the 61.31% assessable proportion.

Tom’s total assessable capital gain: approximately $255,300.

Key takeaway: when a new main residence is bought, the absence rule is severely curtailed for the old property. Tom couldn’t claim main residence treatment for the Brisbane house from March 2020 onwards regardless of the 6-year cap.

Planning note for Tom’s position: deciding when to sell the former main residence relative to when you establish the new one is one of the more important decisions in this fact pattern. Sometimes selling before establishing the new main residence (or in the 6-month overlap allowed under section 118-140) preserves more of the exemption.

Worked Example 3: The Non-Resident Sale (The Brutal One)

Same facts as Tom above. One critical difference: Tom doesn’t return to Australia. He stays in Singapore and sells the Brisbane house in November 2028 while still a foreign resident.

Brace yourself.

Tom has been a foreign resident continuously since April 2013, over 15 years. He doesn’t satisfy the life events test. He’s an ‘excluded foreign resident’ under section 118-110(4).

Under section 118-110(3), the main residence exemption is denied entirely.

Worse, section 118-192 doesn’t help him either. The reset only applies if you’d get a partial main residence exemption. If your exemption is fully denied, section 118-192 doesn’t apply. Tom’s cost base reverts to the original $480,000. This is one of the most punitive aspects of the 2019 changes that many advisers miss.

Tom’s gross gain: $1,250,000 less $480,000 less $25,000 selling costs = $745,000. Entire gain assessable.

Layered Treatment for the Non-Resident Sale

Now we add the foreign resident discount apportionment under Subdivision 115-B and the 1 July 2027 transitional rules.

Tom’s discount testing period: June 2008 to November 2028 (7,460 days). Australian resident June 2008 to April 2013 (1,795 days), foreign resident May 2013 to November 2028 (5,665 days).

Under section 115-115(3) of ITAA 1997 (DTP began before 8 May 2012, taxpayer was resident on that date): apportioned discount = (DTP days – foreign resident days after 8 May 2012) / (2 × DTP days) = (7,460 – 5,665) / (2 × 7,460) ≈ 12%.

Put plainly: Tom was a tax resident for roughly 24% of the DTP, so he gets 24% of the 50% discount = 12%.

Pre-2027 gross gain: $1,150,000 – $480,000 = $670,000. With 12% discount: approximately $589,600 assessable.

Post-2027 gross gain: $75,000. After indexation, real gain ≈ $35,000, fully assessable (no discount post-2027). The 30% minimum rate is moot because Tom is on non-resident rates of 30% from the first dollar.

Tom’s total assessable: approximately $624,600. Using current non-resident rates for illustration (30% to $135,000, 37% to $190,000, 45% above; future rates may change): Australian tax approximately $256,200.

If Tom had returned to Australia first (as in Example 2), his total assessable gain would have been approximately $255,300, with Australian tax of roughly $80,000 to $95,000. The tax cost of selling while non-resident: approximately $160,000 to $175,000. For larger properties or longer holding periods, the differential can easily exceed $500,000.

This is why we keep banging on at clients about not selling former main residence properties while still non-resident. Read it twice if you have to.

Worked Example 4: The UK Investment Property (No Main Residence Element)

Meet Sarah.

Sarah moved from Australia to London in January 2018 and became a UK tax resident and Australian non-resident. In June 2019, while living in London, she bought a flat in Manchester as an investment property for £350,000. She never lived in it. It was always an investment, tenanted from day one.

Sarah returned to Australia and re-established Australian tax residency in August 2024. She kept the Manchester flat tenanted.

In April 2032, Sarah sells the Manchester flat for £620,000.

Two tax systems. Two countries with their hand out. Let’s walk through both.

UK Tax Treatment

Sarah was a UK tax resident when she bought the property, and a UK non-resident when she sells it (she’s been back in Australia since August 2024). Since 6 April 2015, non-UK residents have been liable to UK CGT on disposals of UK residential property, and since 6 April 2019 this extended to all UK land and property.

UK CGT calculation uses the actual cost basis (£350,000), as the 2015 rebasing rules don’t apply (she bought after 5 April 2015). Her gain is £620,000 less £350,000 less £20,000 stamp duty and legal costs less £10,000 selling costs = £240,000.

Using current UK rates and thresholds for illustration only (figures applying in 2032 may differ): after the UK annual exempt amount (£3,000 for 2025-26), taxable gain is £237,000. UK CGT on residential property for higher-rate taxpayers at 2025-26 is 24%. Sarah’s UK CGT: £237,000 x 24% = £56,880.

She must report and pay within 60 days of completion using HMRC’s online property service. Miss the deadline and the penalties stack up quickly.

Australian Tax Treatment

Sarah is an Australian tax resident at disposal in April 2032. Australian residents are taxed on worldwide income and gains, so the UK flat sale is fully in the Australian CGT net.

Section 855-45 of ITAA 1997: when Sarah became an Australian tax resident in August 2024, her non-TAP assets (including the UK flat) were deemed acquired at market value on that date. Market value at August 2024: £510,000, approximately AUD 990,000. The growth from £350,000 to £510,000 during her non-residency is entirely outside the Australian CGT system.

Sarah sells in April 2032 for £620,000, approximately AUD 1,150,000. Gross capital gain for Australian purposes: AUD 1,150,000 less AUD 990,000 less AUD 25,000 selling costs = AUD 135,000.

Applying the 1 July 2027 transitional rules: Sarah’s deemed acquisition date is August 2024. Using the ATO apportionment formula (obtaining a foreign property valuation at 1 July 2027 is impractical), roughly 38% of the gain is pre-2027 and 62% post-2027.

Pre-2027 portion: AUD 51,300, with 50% discount, taxable AUD 25,650.

Post-2027 portion: AUD 83,700 nominal, subject to indexation. The implicit cost base at 1 July 2027 (using the ATO formula) is AUD 990,000 + AUD 51,300 (pre-2027 gain) = AUD 1,041,300. Applying 12% cumulative inflation from July 2027 to April 2032 indexes this to approximately AUD 1,166,000. Sale proceeds net of selling costs (AUD 1,125,000) are less than the indexed cost base, so the post-2027 real gain is effectively eliminated by indexation. Post-2027 real assessable: approximately zero.

Sarah’s total Australian assessable capital gain: approximately AUD 25,650. At her marginal rate of 39% including Medicare levy, her Australian tax liability is approximately AUD 10,000.

The FITO Calculation

Sarah paid UK CGT of £56,880, approximately AUD 105,500. Under Australia’s Foreign Income Tax Offset rules (Division 770 of ITAA 1997, which prevents double taxation on amounts assessable in both countries), she can claim a FITO for the UK tax paid, with two wrinkles.

First, under the ATO’s view in ATO ID 2010/175 (confirmed in the Commissioner’s decision impact statement following the Full Federal Court decision in Burton), where foreign tax is paid on a foreign capital gain but only a portion is included in Australian assessable income, only a corresponding proportion of the foreign tax counts towards the FITO. TD 2020/7 is separate but related: it confirms that capital gains can’t be included under subparagraph 770-75(4)(a)(ii) when calculating the FITO limit.

Sarah’s Australian assessable gain (AUD 25,650) is roughly 5.6% of her total UK taxable gain (£237,000, AUD 460,000). So roughly 5.6% of AUD 105,500 = approximately AUD 5,900 counts towards the FITO. The remainder is not refundable and cannot be carried forward.

Second, under section 770-75 of ITAA 1997, the FITO is capped at the Australian tax payable on the foreign-sourced income (at least AUD 10,000 in Sarah’s case).

Sarah’s FITO claim: AUD 5,900 (lesser of eligible foreign tax and FITO limit). Net Australian tax after FITO: approximately AUD 4,100. Total combined tax (UK plus Australian): approximately AUD 109,600.

The effective rate is high because Sarah is being taxed on overlapping but not identical measures of the same gain, with the FITO providing only partial relief.

Planning note: if Sarah had sold the Manchester flat before returning to Australia, only the UK CGT would have applied. Her total tax bill would have been approximately £56,880 (around AUD 105,500), rather than the combined UK and Australian tax of approximately AUD 109,600. The difference is small here. For properties with higher unrealised gains, the difference can be substantial.

Worked Example 5: The US Main Residence Sold After Return

Meet James.

James moved from Australia to the United States in February 2015. In July 2015 he bought a house in Boston for USD 850,000 and lived in it as his main residence (his US ‘principal residence’ under section 121 of the Internal Revenue Code) until his return to Australia in March 2024.

On returning, James re-established Australian tax residency. He didn’t sell the Boston house immediately. He rented it out from May 2024 onwards.

In April 2032, James sells the Boston house for USD 1,650,000. By that point he’s been an Australian tax resident for 8 years. The Boston house has been tenanted for the same period. Two countries again. Different rules. Some lifelines, some traps.

US Tax Treatment Under Section 121

US section 121 of the Internal Revenue Code allows a US taxpayer to exclude up to USD 250,000 of gain on the sale of their ‘principal residence’ if they meet the ownership test (owned for at least 2 of the 5 years before sale) and the use test (used as principal residence for at least 2 of the 5 years before sale).

James’s relevant 5-year period is April 2027 to April 2032. James satisfies the ownership test (he owned the house for the entire lookback, having bought it in July 2015). However, he fails the use test (having returned to Australia in March 2024, he didn’t use it as his principal residence during the April 2027 to April 2032 lookback). Failing either test denies the exclusion. No section 121 exclusion available.

US tax calculation (using adjusted basis after USD 60,000 depreciation): adjusted basis USD 790,000. Total gain on sale: USD 1,650,000 less USD 790,000 less USD 25,000 selling costs = USD 835,000. Of this, USD 60,000 is depreciation recapture taxed at 25% (USD 15,000), and USD 775,000 is long-term capital gain taxed at 23.8% effective rate (20% federal + 3.8% NIIT) = USD 184,450. Total US federal tax: approximately USD 199,450. Massachusetts state tax may add further on top.

Australian Tax Treatment and the TD 95/7 Lifeline

This is where a little-known tax determination, TD 95/7 becomes critical. And it’s the one piece of good news in this example.

The ATO’s Taxation Determination TD 95/7 confirms that a taxpayer can make a choice under section 118-145 to treat an overseas dwelling that ceased being their main residence before they became an Australian resident as if it continued to be their main residence during their absence from it.

In plain English: James’s Boston house was his main residence from July 2015 to March 2024. When he returned to Australia in March 2024, the house ceased being his main residence. Under TD 95/7, James can elect to apply section 118-145, treating the Boston house as his main residence during his absence from it (running from his Australian residency commencement in March 2024). Without TD 95/7, the Boston house wouldn’t qualify for any Australian main residence treatment at all.

Under section 855-45 of ITAA 1997, James’s Boston house was deemed acquired at market value of USD 1,400,000 (approximately AUD 2,100,000) when he became an Australian tax resident in March 2024.

Note: section 118-192 doesn’t apply in James’s case. Whether he’d have been entitled to a full Australian main residence exemption just before the Boston house was first leased in May 2024 is arguable. We’d treat the section 118-192 reset cautiously here.

Australian deemed ownership period: March 2024 to April 2032, approximately 2,953 days. Section 118-145 covers March 2024 to March 2030 (6 years), approximately 2,191 days. Uncovered period: March 2030 to April 2032, approximately 762 days. Assessable proportion: 25.80%.

Australian gross gain: sale price AUD 2,750,000 less section 855-45 deemed cost base AUD 2,100,000 less selling costs AUD 40,000 = AUD 610,000. Assessable portion: AUD 157,400.

Applying the proposed 1 July 2027 Transitional Rules

James obtained a valuation of the Boston house at 1 July 2027 showing USD 1,520,000 (approximately AUD 2,280,000).

Pre-2027 gross gain: AUD 180,000. Post-2027 gross gain: AUD 430,000.

After applying the 25.80% assessable proportion: pre-2027 assessable AUD 46,440, post-2027 assessable AUD 110,940.

Pre-2027 with 50% discount: AUD 23,220 taxable. (No s115-115 apportionment applies for James because he was Australian resident throughout the discount testing period that started at the section 855-45 deemed acquisition in March 2024.)

Post-2027 with indexation: assuming 12% cumulative inflation from July 2027 to April 2032, indexation reduces the real gain to approximately AUD 156,400 (gross). After applying the 25.80% assessable proportion, the post-2027 real assessable gain is approximately AUD 40,400, subject to the 30% minimum rate.

James’s total Australian assessable capital gain: approximately AUD 63,600. At his marginal rate of 39% including Medicare levy, the Australian tax liability is approximately AUD 24,800.

FITO Calculation for James

James paid US tax of approximately USD 199,450, approximately AUD 299,200.

Apportionment for FITO eligibility: James’s Australian assessable gain (AUD 63,600) is approximately 5.1% of his US taxable gain (USD 835,000 converted is approximately AUD 1,252,500). So roughly 5.1% of the US tax counts toward the FITO: approximately AUD 15,200.

FITO claim: the lesser of eligible foreign tax (AUD 15,200) and the FITO limit (AUD 24,800, being the Australian tax payable on the gain). James claims AUD 15,200 as FITO.

James’s net Australian tax after FITO: approximately AUD 9,600.

Total combined US plus Australian tax: approximately AUD 308,800.

If James had sold the Boston house before returning to Australia, he would have qualified for the section 121 exclusion (USD 250,000 as a single filer). For comparison only (and noting the same USD 1,650,000 sale price isn’t realistic for a March 2024 sale, when the property was valued around USD 1,400,000), estimated US tax on the gain less USD 250,000 exclusion at 23.8%: approximately USD 125,000 (around AUD 187,400).

Cost of returning to Australia before selling the Boston house: approximately AUD 121,400 in additional tax.

Planning lesson: for US expats returning to Australia who still hold a US main residence, section 121 exclusion timing is critical. The exclusion requires 2 of the 5 years before sale to be principal residence use. Once you’ve been away for more than 3 years (because the 5-year lookback then includes the post-departure rental period), you lose section 121 eligibility entirely. Gone.

For clients returning from the US, we typically work through three scenarios.

• One: sell before return to maximise section 121 and avoid Australian CGT entirely.
• Two: sell within roughly 3 years of return to preserve section 121 eligibility.
• Three: hold long-term and accept that section 121 is gone, but minimise Australian CGT via TD 95/7 and the section 118-145 absence rule.

The right option depends on your numbers and your timeline.

Main Residence Exemption Planning Levers for Australian Expats

Five strategies that matter for Australian expats with main residence exemption issues. None of them are clever tax tricks. They’re just the rules, applied to your situation.

Return Before Selling

For any former Australian main residence held by a non-resident, returning to Australia and re-establishing tax residency before disposal restores access to the main residence exemption rules (section 118-145 absence rule, section 118-192 cost base reset, section 118-185 partial exemption, and where relevant section 118-190 income-producing use adjustment). The differential can easily run to hundreds of thousands of dollars on long-held properties. This is the single biggest planning lever, full stop.

Use the Life Events Exception If You Qualify

Section 118-110(5) (the ‘life events test’) applies where you have been a foreign resident for 6 years or less AND a qualifying life event occurred during your foreign residency (terminal medical condition of you, your spouse, or your child under 18; death of your spouse or your child under 18; or certain family law events involving you and your spouse or former spouse). If the test is satisfied, the 2019 denial rule should not apply. The ordinary main residence rules still need to be worked through after that, so the outcome may still be full, partial, or nil depending on the facts. Document everything carefully if you’re relying on this.

Sell After Returning to Australia, Even If Briefly

This is the one most people get wrong. Pin it to the fridge.

Selling your former Australian main residence while you remain a foreign resident generally means the exemption is denied entirely under the 2019 rules. Doesn’t matter if you’re within 6 years of departure. The 6-year absence rule in section 118-145 does NOT override the 2019 foreign resident denial rules.

To preserve any main residence exemption, you generally need to be an Australian tax resident at the time of the sale. The cleanest move is to return, re-establish tax residency genuinely (not cosmetically), then sell. Substance matters. The ATO doesn’t care about a token visit followed by a quick contract.

Strategic Move-Back to Reset the Absence Clock

If you’ve been overseas longer than 6 years and your former main residence is tenanted, returning to Australia, moving back into the dwelling, and re-establishing it as your main residence for a meaningful period can reset the 6-year clock under section 118-145. The next absence then gets a fresh 6-year window. Requires genuine re-establishment (more than a token visit).

Timing Relative to 1 July 2027

If you’ve got flexibility on when you dispose, the 1 July 2027 split point matters. Disposals before 1 July 2027 keep the entire assessable gain under the existing 50% discount rules. Disposals after 1 July 2027 are split between pre-2027 (50% discount, potentially apportioned for non-residency under section 115-115) and post-2027 (indexation plus 30% minimum tax). For long-held properties with substantial accrued gains, pre-2027 disposal often produces the better outcome, especially if you’re an Australian resident at disposal.

The ‘New Build’ Wrinkle for Former Main Residences

Brief note worth flagging. The new negative gearing rules from 1 July 2027 restrict negative gearing to ‘new build’ residential properties, which the Budget defines to include dwellings built where existing ones have been demolished and replaced with a greater number of dwellings.

In theory, a client who demolishes their former main residence and builds a duplex or apartment block on the same land creates new builds for negative gearing purposes. The new dwellings would qualify for negative gearing under the post-2027 rules and would let the investor choose between the 50% discount and indexation for CGT when eventually sold.

The wrinkle is the main residence exemption. Demolishing the former dwelling may trigger CGT event C1 in relation to the dwelling, but the underlying land is not necessarily disposed of at that time. The CGT consequences depend on the asset analysis, whether the land is subdivided, the title structure, whether the project is on capital or revenue account, GST, and the interaction with the main residence rules. Treat any ‘demolish-and-rebuild’ strategy with great care and full professional advice.

The Quiet Question We Now Get Every Week

Here’s something worth sharing.

Before this Budget was even handed down, our most-booked appointment by some distance was the Outbound Expat Tax Consultation. The conversation goes roughly like this. The client is Australian, currently living in Australia, paying Australian rates, watching their after-tax outcomes get squeezed at every turn. They want to understand what it would actually take to break Australian tax residency and move to Singapore, Hong Kong, the UAE, one of the lower-tax European jurisdictions, or one of the various territorial-tax countries in Asia.

Not ‘retire abroad’. Not ‘year off in Bali’. Genuine, permanent, structured moves.

These conversations have been quietly increasing for years. With the proposed Budget changes, we expect them to increase further.

The pattern is consistent. Founders building something serious. Software engineers, consultants and other high-skill mobile workers. Investors with substantial portfolios who can run their affairs from anywhere with decent broadband. Retirees with enough savings to make residency a choice rather than a default. Families with school-aged children who treat education and lifestyle considerations as part of the decision.

None of them are leaving to dodge tax. Every one of them would happily pay reasonable Australian tax if the rules felt stable and the after-tax outcome felt fair.

What they’re reacting to is the trajectory. Layer of complexity on layer of complexity. New minimum rates. New denial rules. New restrictions on legitimate planning structures. The cumulative message they read is: ‘if you’ve built something or saved something here, the rules are going to keep changing on you’.

A country that wants its talent, capital and entrepreneurs to stay should be doing the opposite of that.

If you’re reading this article and the thought crossing your mind is ‘actually, maybe I should look at what leaving Australia would mean for me’, you’re not alone, and you’re not unreasonable. We have those conversations every week. We’re not advising anyone to leave or to stay. That’s a personal decision. We do model the numbers honestly, including the costs, the practicalities, and the non-tax considerations. Then we let the client make their own call.

Either way, we suspect this is going to be one of the bigger demographic stories of the next decade, even if it never quite makes the front page.

Right, So What Now?

Look, here’s the bottom line.

The biggest changes to property and investment tax in Australia in 25 years are coming. They’re real. They start applying in 14 months. They’re dressed up as a fix for the intergenerational property crisis, but on our reading they’ll hit younger Australians trying to save, self-funded retirees, small business families, and the entrepreneurs the country actually needs to keep. The wealthy investors the policy claims to target will, by and large, already be set up to navigate the new rules. They’ve got advisers. They’ve got structures. They’ve got options.

What you can do is be one of the people with options too. That starts by understanding precisely how the changes affect your specific situation, and then planning around them with as much lead time as you have.

The right response depends entirely on your specific circumstances. Your residency status. Your asset profile. Your future plans. Your country of current residence. Your eventual return plans, if any.

Generic advice is not advice. The difference between the right strategy and the wrong strategy can easily run to tens of thousands of dollars in tax. For some clients, the difference between staying in Australia and leaving Australia runs into the hundreds of thousands.

We’ve spent more than 20 years specialising in tax for Australian expats. If you’ve got Australian property, foreign assets, a trust structure, or any meaningful wealth that’s going to be affected by these changes, the conversation is worth having now rather than later. If you’re starting to think seriously about leaving Australia, we run that consultation too, more often than any other.

Important Notes

This article is general information based on legislation as at publication and on the 2026-27 Federal Budget announcement of 12 May 2026. The draft legislation for the 1 July 2027 CGT changes hasn’t yet been released, and the interaction with the main residence exemption (including the section 118-192 cost base reset and section 118-145 6-year absence rule) may differ once enacted. We’ll update this article as detail emerges.

The worked examples are illustrative and use simplified assumptions. Actual calculations require detailed analysis of your specific circumstances, including exchange rate movements, valuation evidence, CGT cost base elements, and interaction with other tax provisions. US tax calculations in Example 5 don’t account for state taxes, AMT, depreciation recapture nuances, or FIRPTA. UK tax calculations in Example 4 don’t account for principal private residence relief or letting relief. Foreign tax calculations should always be done by a qualified practitioner in the relevant jurisdiction.

The views expressed in the editorial sections of this article (including ‘Our Honest Take Before We Start’ and ‘The Quiet Question We Now Get Every Week’) are the considered opinions of Expat Taxes Australia based on our practice experience advising Australian expats. They’re commentary on tax policy, not personal tax advice. Reasonable people may disagree, and your situation may call for a different conclusion once your facts are on the table.

The 2026-27 Budget papers are publicly available at budget.gov.au if you want to read them in full.

Right. That’s the lot. Time to make some decisions.

• About
• Latest Posts

Follow me

Shane Macfarlane CA

CEO & Founder at Expat Taxes

Shane's an Australian Chartered Accountant and Australian expat tax specialist who's also an expat himself (based in Asia). Shane's passionate about tax and legitimate tax minimisation, tax-planning and structuring, particularly as it relates to Australian expats who are often subject to high rates of tax back home in Australia.

Follow me

Latest posts by Shane Macfarlane CA (see all)

• 2026 Budget Main Residence Exemption: Expat Tax Guide - 15/05/2026
• Australian Expat Tax Changes – 2026 Budget Guide for Expats - 13/05/2026
• Foreign Income Reporting for Australian Expats: Resident vs Non-Resident Rules - 24/03/2026