The Six-Year Rule Explained: Renting Out Your Home Without Losing the CGT Exemption

Here’s a bit of tax law that actually works in your favour for once. Most Australians know the family home is usually exempt from capital gains tax. Sell the place you genuinely lived in, meet the conditions, and the ATO usually waves you through. Lovely. Sadly, rare, but lovely, all the same.

But the word “usually” is doing some heavy lifting. The full exemption depends on the property being a dwelling, actually being your main residence, not being used in a way that limits the exemption, and generally being on land of two hectares or less. Tax law gives with one hand and immediately starts applying additional taxation law and takes with the other.

What far fewer people know is that you can move out, rent the place to someone else, and still keep that exemption for years. It even has a friendly nickname: the six-year rule. It’s one of the most useful concessions in the system, and one of the most misunderstood. So let’s walk through how it actually works, who it works for, and the traps that quietly turn a tax-free sale into a taxable one.

The myth worth busting first

Plenty of people assume that the moment they move out and a tenant moves in, the home flips into an investment property and the taxman starts the CGT clock. Reasonable guess. Often wrong.

Thanks to what the law calls the “absence rule,” you can choose to keep treating your former home as your main residence even after you’ve stopped living in it. Get it right and the capital gain stays exempt, tenant or no tenant.

Important: the rent is still taxable

One thing to clear up immediately, because it trips people up: the six-year rule is a CGT rule. It can protect the capital gain when you eventually sell. It does not make the rent disappear from your tax return.

If you rent the property out, the rent is still assessable income, and the usual rental deduction rules apply. So yes, the ATO may let you keep the CGT exemption and still ask about the rent each year. Generous, but not entirely so

How the six-year rule works

The rule lives in section 118-145 of the Income Tax Assessment Act 1997, and the mechanics are simpler than the section number suggests:

• If you move out and rent the place out, you can keep treating it as your main residence for up to six years.
• If you move out and leave it empty (or let a family member stay rent-free), you can keep treating it as your main residence indefinitely, with no time limit at all.
• Move back in and genuinely re-establish it as your home, and the clock resets. A fresh absence later can get its own new six-year run.

One boring but vital starting point: the property must actually have been your main residence first. Not “I meant to live there.” Not “I changed my licence for a week and hoped for the best.” Your facts need to show it was genuinely your home before you moved out. If it was rented out before it ever became your main residence, that earlier rental period isn’t rescued by the six-year rule.

When it applies, it’s powerful. Sell within the covered period and the main residence exemption can wipe the capital gain entirely. No CGT, and usually no fiddly calculation either.

The catch nobody mentions: one main residence at a time

Here’s the trade-off. You can generally only treat one property as your main residence at any given moment. So if you move out, rent the old place out, and buy a new home to live in, you can’t have the exemption on both for the same period. You have to pick.

Choose to keep the exemption running on the old rental under the six-year rule, and your new home may not be covered for that overlap. That can leave a slice of its eventual gain taxable. Choose to cover the new home, and the old one may lose its exemption from the day you moved out. There is a limited changeover rule that can let two homes be treated as your main residence for up to six months, but it has conditions. In particular, the old home generally needs to have been your main residence for at least three continuous months in the 12 months before you sell it, and it must not have been used to produce income during certain parts of that period. Translation: the six-month rule isn’t a free second hat. It’s a small hat with paperwork.

The good news is you don’t usually have to lock the choice in the day you move out. You make it when preparing the tax return for the year the relevant CGT event happens. The bad news is the choice has real money attached, so model it rather than squinting at it and hoping.

Rent it out for more than six years?

If you rent the home out for longer than six years in one absence and then sell, the exemption usually no longer covers the whole period. Broadly, the first six years of that income-producing absence can stay protected, provided you’re not treating another property as your main residence for the same period. The gain attributable to the period beyond the six-year limit can become taxable on a proportional basis.

One rule that often softens the blow is the “home first used to produce income” rule in section 118-192. If the home was fully covered by the main residence exemption just before it was first rented out, and the first income-producing use was after 20 August 1996, you may be taken to have acquired it at market value on the day it first became income-producing.

That reset can shrink the taxable gain considerably. The practical takeaway: get a market valuation when you first rent the place out. It’s the tax equivalent of keeping the receipt, except the receipt is a valuation report and nobody frames it.

One more trap: if you used part of the home to produce income before you moved out, such as a business room, a surgery or a separately rented area, that part may never get the full ride. The six-year rule is good. It’s not a pressure washer.

The one condition that can decide everything: your residency when you sell

Now the big one, and it’s the reason this article has a sibling. Everything above usually assumes you’re an Australian tax resident at the time you sell. For a normal property sale, the relevant CGT event generally happens when you sign the sale contract, not at settlement, so that contract date can be the switch that turns the exemption on or off.

If you’ve moved overseas and become a foreign resident, the picture changes dramatically, and not in your favour. Foreign residents selling a former Australian home after 30 June 2020 are generally denied the main residence exemption altogether, unless the narrow life-events test applies. That can be true even if the property was genuinely your home for years. Tax law, in one of its warmer moments, does not care about the veggie patch.

We cover that trap in detail in our guide to the main residence exemption and the six-year rule for expats. If you’re moving overseas, or already living there, read that one before you sign anything with a real estate agent and a nice pen.

Don’t forget the CGT discount

If part of your gain does end up taxable, the CGT discount may still matter. Under the current rules, Australian resident individuals who’ve held the property for at least 12 months can generally access the 50% CGT discount, which halves the taxable capital gain after capital losses.

Foreign-resident and temporary-resident periods are trickier. The full 50% discount hasn’t been available for post-8 May 2012 foreign-resident periods, and the discount can be reduced depending on your residency history. So the answer isn’t just “held it for a year, job done.” Tax law enjoys a sequel.

One more update for a June 2026 article: the 2026-27 Federal Budget proposed replacing the 50% CGT discount with inflation-based indexation and introducing a minimum 30% tax rate on capital gains accruing from 1 July 2027. Bills have been introduced, but the final law should still be checked before relying on it. For anyone selling after 1 July 2027, this isn’t background noise, it’s the drumbeat. We cover it in our 2026 Budget guide for expats.

The bottom line

The six-year rule is one of the genuinely useful concessions: it can let you move out, earn rent, and still sell without a CGT bill, provided you play it properly.

But the moving parts matter. The property must have been your main residence first. Rental income still goes in your tax return. You can generally only nominate one main residence at a time. The six-year clock matters if the place is rented. A valuation when the home first earns income can be worth real money. And if you move overseas, your tax residency on the contract date can change everything.

Used well, the rule can save a small fortune. Used carelessly, it becomes a very expensive story that starts with “I thought.” Never a promising opening sentence in tax.

Thinking of renting out your home?

Whether the six-year rule saves you a packet or quietly slips through your fingers usually comes down to timing and a couple of choices made at the right moment. Our team helps Australians work out how the rule applies to their home, when to get a valuation, which property to nominate, and how it all changes if a move overseas is on the cards.

Book an appointment with our specialist team today, ideally before you list the property. A bit of admin now saves a world of bother later.

General information only. This article doesn’t consider your personal circumstances and isn’t tax or financial advice. The CGT treatment of a property sale depends on your specific facts, your residency at the time of the relevant CGT event, your ownership history and timing, and figures and thresholds change over time. Some measures referred to are proposed but not yet law and may change. Speak to our specialist team today, or with another registered tax agent, before acting.