Under s.118-145 ITAA 1997, retirees can rent out a former home for up to 6 years (or indefinitely if left vacant) while still claiming the CGT main residence exemption on sale — useful for aged care entrants renting to fund care costs. But Centrelink's principal home exemption only lasts 2 years from entry to care, so the CGT and Age Pension clocks run independently and can diverge significantly.
When a retiree moves out of their long-held family home — into aged care, a smaller dwelling, a relative's home, or overseas — the natural assumption is that the family home loses its CGT main residence status the moment occupation ends. Section 118-145 of the Income Tax Assessment Act 1997 provides the alternative. The "absence rule" allows a taxpayer to continue treating a former main residence as their main residence for capital gains tax purposes for up to 6 years while the home is rented out, or indefinitely while the home is not used to produce income. The rule is designed for exactly the kind of late-life transition many retirees face: circumstances change, the family home isn't immediately sold, and the emotional or practical connection persists.
The mechanic operates on a taxpayer election. After ceasing to occupy the dwelling as the main residence, the taxpayer chooses — typically at sale — to continue treating the former home as the main residence for CGT purposes (ATO, ato.gov.au/.../treating-former-home-as-main-residence). The dwelling then continues as the CGT main residence indefinitely while not producing income, or for up to 6 years cumulatively if rented out. Each new period of genuine re-occupation followed by a new absence resets the 6-year clock — the ATO treats each absence period separately. The "genuine" qualification matters: token re-occupations designed only to refresh the clock do not work; a substantive period of actual living in the property is required.
The trade-off is the single-main-residence rule. A taxpayer can have only one main residence at a time for CGT purposes. Where the retiree has acquired a new principal residence — a smaller apartment after downsizing, a unit purchased for the move — they must choose which property to treat as the main residence for the period of overlap. The choice is made retrospectively at sale rather than in advance. Choosing the former home preserves its CGT exemption but means the new dwelling is not CGT-exempt during the period the former home is the elected main residence. For most retirees, this trade-off favours the former home: it has typically been held longer, accumulated a larger capital gain, and is the more valuable asset.
The dollar saving makes the rule worth understanding precisely. Consider a retiree selling a long-held family home that's been rented for 5 years under the absence rule. Without the election, the property is CGT-assessable for the proportion of ownership during which it was rented and not the main residence. For a property held 30 years and rented for 5, the assessable proportion is 5/30 — roughly 17%. For a property purchased for $200,000 (illustrative) thirty years ago and now worth $1,500,000 (illustrative), the capital gain is $1,300,000. Without the election: 17% × $1,300,000 = $221,000 assessable gain; with the 50% CGT discount for individuals (ITAA 1997 Div 115), $110,500 net taxable; at marginal rates of around 32.5% including Medicare levy, roughly $36,000 (illustrative) in tax. With the election: zero.
For retirees moving into aged care, the rule has specific and common applications. The most frequent case: renting out the family home to generate cash flow for the daily accommodation payment, means-tested care fee, or general living expenses while in care. The 6-year rule preserves the CGT exemption for that rental period, allowing the home to be sold tax-free at any point within those 6 years. Alternative case: leaving the home vacant — the absence rule applies indefinitely without the 6-year cap.
The Centrelink interaction is where retirees and even some advisers get confused. The CGT absence rule does not change the Age Pension treatment of the principal home. For Age Pension purposes, a person entering residential aged care retains the principal home as an exempt asset for 2 years from the date of entry to care (DSS Guide 4.6.3.70, guides.dss.gov.au/social-security-guide/4/6/3/70). Where the home is rented during that 2-year period, rent received by the income support recipient or their partner is also exempt from the income test — a useful bonus for retirees using rental income to fund care costs. After 2 years, the home becomes an assessable asset for the Age Pension means test. This clock runs independently of the CGT 6-year rule. A retiree can be fully within the 6-year CGT window while the Centrelink exemption has expired and the home is already being counted against them. Both rules need to be tracked separately.
A significant trap for retirees considering overseas retirement: from 9 May 2017, foreign residents for tax purposes are broadly unable to claim the main residence exemption on Australian residential property (ATO, ato.gov.au/.../main-residence-exemption-for-foreign-residents). A narrow "life events" exception exists — the taxpayer was a foreign resident for 6 years or less and one of the following applies: terminal medical condition, death of a spouse or child under 18, or formal breakdown of a marriage or relationship — but the general exemption is unavailable. A transitional rule allowed the exemption for properties acquired before 9 May 2017 and sold by 30 June 2020, but that window has long closed. For retirees considering relocating overseas, the practical implication is to sell the Australian home before becoming a non-resident for tax purposes.
What happens with aged care rental, the 6-year CGT window, and the Centrelink cliff?
Margaret, 74, widowed, moves into residential aged care in January 2024. She rents out the family home to help fund her daily accommodation payment. The home was bought in 1996 for $185,000 and is currently valued at $1,400,000. Under s 118-145 ITAA 1997, the home remains Margaret's main residence for CGT purposes for up to 6 years from January 2024 — until January 2030. If Margaret sells in January 2028 (4 years after entry to care): capital gain $1,215,000; with the absence rule election, $0 tax. Without: 4/28 × $1,215,000 = $173,571 assessable gain; 50% discount = $86,786 net taxable; approximately $28,000 tax at marginal rates. For Centrelink, the home is assets-test exempt for 2 years (until January 2026), and rent during that period is income-test exempt. From January 2026 the home becomes assessable for Age Pension purposes regardless of where Margaret sits in her 6-year CGT window. The two clocks diverge: CGT gives Margaret until 2030 to sell tax-free; Centrelink treats the home as an assessable asset from 2026 onwards.
What happens when a downsizer elects the former home as main residence?
Robert, 70, downsized in July 2021, purchasing a city apartment for $680,000 and keeping his long-held family home (bought 1991 for $130,000, now worth $1,150,000) as a rental. He moved out of the family home in July 2021. A taxpayer can only hold one CGT main residence at a time. Robert elects the family home as his CGT main residence — preserving its exemption under the 6-year rule — which means the apartment is not covered by the main residence exemption for the overlap period. If Robert sells the family home in December 2026 (5.5 years after moving out): gain of $1,020,000 is fully exempt — zero CGT. If instead he had elected the apartment as main residence and sold the family home at the same time: 5.5/35 × $1,020,000 = $160,286 assessable gain; 50% discount = $80,143 net taxable; approximately $26,000 in tax. Electing the former home — the larger, longer-held, higher-gain asset — produces the better outcome here, though the full analysis depends on Robert's likely eventual gain in the apartment as well.
Sources
- Australian Taxation Office (ATO) — Treating former home as main residence
- Australian Taxation Office (ATO) — Main residence exemption for foreign residents
- DSS Social Security Guide
Key takeaways
- Under section 118-145 of the Income Tax Assessment Act 1997, a taxpayer can elect to continue treating a former main residence as their main residence for CGT purposes for up to 6 years while it's rented out, or indefinitely if it's left vacant and not producing income.
- A taxpayer can only have one CGT main residence at a time — a retiree who has also acquired a new home must choose, at sale, which property to treat as the main residence for the overlap period, and for most retirees the former (larger, longer-held) home produces the better tax outcome.
- For retirees entering aged care, the CGT absence rule is commonly used to rent out the family home tax-free to help fund the accommodation payment or means-tested care fee — but this is entirely separate from Centrelink's rules, which only exempt the principal home from the Age Pension assets test for 2 years from entry to care (with rent also income-test exempt during that period).
- The two clocks run independently and can diverge sharply — a retiree can be well within their 6-year CGT window for a tax-free sale while the home has already become a fully assessable asset for Age Pension purposes after the 2-year Centrelink exemption expires.
- Since 9 May 2017, foreign residents for tax purposes generally cannot claim the main residence exemption on Australian property at all, aside from a narrow life-events exception (terminal medical condition, death of a spouse or child under 18, or relationship breakdown, for those who were foreign residents for 6 years or less) — retirees planning to relocate overseas should generally sell the Australian home before becoming a non-resident for tax purposes.
Frequently asked questions
How long can I rent out my former home and still claim the CGT main residence exemption?
Under the absence rule in section 118-145 of ITAA 1997, you can continue treating a former main residence as your main residence for CGT purposes for up to 6 years while it's rented out, or indefinitely if it's left vacant and not producing income. Each new period of genuine re-occupation followed by a fresh absence resets the 6-year clock.
Does the CGT 6-year absence rule mean my home stays exempt from the Age Pension assets test too?
No — this is a common point of confusion. The CGT absence rule and Centrelink's means test operate on entirely separate rules. For Age Pension purposes, a person entering residential aged care retains the principal home as an exempt asset for only 2 years from the date of entry, after which it becomes fully assessable, regardless of where you sit in your 6-year CGT window.
If I downsize and keep my old home as a rental, which property gets the CGT exemption?
You can only have one CGT main residence at a time, so you must elect, at the time of sale, which property to treat as the main residence for the period of overlap. For most retirees, electing the former home is the better choice, since it's typically been held longer and accumulated a larger capital gain than the newer property.
Can I still claim the main residence exemption if I move overseas in retirement?
Generally not. Since 9 May 2017, foreign residents for tax purposes are broadly unable to claim the main residence exemption on Australian residential property, aside from a narrow life-events exception covering a terminal medical condition, the death of a spouse or child under 18, or a relationship breakdown, for those who were foreign residents for 6 years or less. If you're planning to relocate overseas, it's generally best to sell the Australian home before becoming a non-resident for tax purposes.