The CGT main residence exemption allows Australian homeowners to sell their principal place of residence without capital gains tax. Full exemption applies where the property has been the main residence for the entire ownership period without income production. Partial exemption applies where any period involved income-producing use. The absence rule can preserve the exemption for up to six years of renting, or indefinitely if left vacant.
For most Australians, the family home is the most valuable asset they own. The capital gains tax (CGT) main residence exemption allows that asset to be sold without CGT applying to the gain — in most cases. The phrase "in most cases" conceals specific rules that matter particularly to retirees, who are more likely than other Australians to have been absent from the property at some point, to have used part of it to produce income, or to be dealing with an inherited property. Understanding the framework helps you plan property decisions with confidence rather than finding out about a CGT exposure after the sale is done.
How does the CGT main residence exemption work in principle?
The CGT main residence exemption is contained in Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997). It allows an Australian tax resident to sell their principal place of residence — the home they actually live in — without CGT applying to the capital gain. For a home owned for twenty or thirty years, this can represent a very substantial tax saving.
The full exemption applies where the property has been the owner's main residence for the entire ownership period, has not been used to produce income, and the owner has been an Australian tax resident throughout. Where any of these conditions is not met, partial exemption applies: the proportion of the gain attributable to main residence use is exempt, while the proportion attributable to other uses is taxable (subject to the 50% CGT discount for assets held more than 12 months, per ITAA 1997 s.115-100).
The practical calculation is a pro-rata based on days. A property owned for 20 years, used as the main residence for 15 years and rented out for 5 years, would have 75% of the gain exempt and 25% taxable. The taxable portion would then be halved by the 50% discount, leaving an effective 12.5% of the total gain to be assessed as income. Records of the periods of use matter — the more precise the records, the more accurate and defensible the calculation.
What is the CGT absence rule for the main residence exemption?
A common situation for retirees, and for working-age Australians who later become retirees, is an extended period of absence from the home — for work relocation, family caring, extended travel, or time spent in a second property. The absence rule under ITAA 1997 s.118-145 allows the dwelling to continue to be treated as the main residence during the absence.
If the property is rented out during the absence, the treatment as main residence can continue for up to six years. If the property is left vacant — not used to produce income — there is no time limit on the absence: the owner can be away indefinitely and still treat the property as their main residence, provided no other property is being claimed as a main residence simultaneously. There can only be one main residence at any time, so if you acquire a second property and establish it as your main residence during the absence, the original property's main residence status ends from that point.
This rule is particularly useful for retirees who spend part of each year in a different location, or who have relocated to be nearer family, or who have temporarily moved into aged care for a period before returning home. As long as the property is not rented during the absence and no other property is claimed, the exemption can be preserved regardless of how long the absence lasts.
How does income-producing use affect the main residence exemption?
If any part of the home has been used to produce income — a room rented to a boarder, a granny flat tenanted separately, a home office area claimed as a tax deduction for business purposes, or short-term rental through platforms such as Airbnb — partial exemption may apply on sale. The proportion of the property used for income production, for the period it was so used, reduces the exempt portion of any eventual gain.
Minor or incidental use — the occasional use of a home office room that was not separately rented or dedicated exclusively to income production — may be disregarded. Substantive, ongoing income-producing use of a defined portion of the property is a different matter. For retirees who have rented a room, operated a home-based business with a dedicated space, or listed the property on short-term rental platforms for part of the year, the partial exemption calculation is relevant, and records of the arrangement matter.
This is increasingly common given the growth of working from home and short-term rental activity. Retirees who have engaged in either should flag it when they eventually sell, as the tax calculation on sale needs to account for it.
How does the CGT main residence exemption apply to inherited property?
The CGT treatment of inherited property is one of the more technically complex areas. The general framework under ITAA 1997 s.118-195 provides a beneficial treatment where the deceased used the property as their main residence. Where the inherited dwelling was the deceased's main residence and was not being used to produce income at the time of death, and the beneficiary or estate sells it, the following rules apply. If the property is sold within two years of the deceased's death, the main residence conditions can be treated as met regardless of what the beneficiary does with it in the interim — this allows time for estate administration, probate, and sale without losing the exemption. If the beneficiary occupies the property as their own main residence after inheritance, the exemption can continue under their ownership; if they rent it out or use it for income production, the partial exemption rules apply from the point of non-main-residence use.
For pre-1985 properties (acquired before 20 September 1985, the introduction of CGT), the cost base is reset to market value at the date of death — any gain accumulated before that date disappears for CGT purposes. For post-1985 properties that were the deceased's main residence, the cost base is similarly reset to market value at death, meaning any gain during the deceased's ownership is extinguished. For executors, beneficiaries, and surviving spouses dealing with an inherited property, the analysis benefits from specialist tax advice given the multiple overlapping conditions.
What is the two-property transition rule and how long does it last?
For retirees downsizing or moving, a practical concern is the sequencing of selling the old home and settling on the new one. Where the new property is purchased and becomes the main residence before the old property is sold, there is a window under ITAA 1997 s.118-140 during which both properties can be treated as the main residence simultaneously. This overlap period is up to six months. If the old property is sold within six months of the new property being purchased, the full exemption is preserved on the old property. If the sale takes longer than six months, the old property's main residence treatment ends at the six-month mark, and partial exemption applies for the period beyond it.
This six-month window is generally sufficient for most ordinary property transactions and allows retirees to purchase the new property without rushing the sale of the old one in order to avoid CGT exposure.
Can you combine the main residence exemption with a downsizer super contribution?
For retirees aged 55 or older selling a principal residence they have owned for at least ten years, the main residence exemption and the downsizer super contribution operate independently of each other. The sale is covered by the main residence exemption — producing a tax-free or substantially reduced-CGT outcome depending on the period of main residence use. The sale proceeds can then be contributed to superannuation as a downsizer contribution of up to $300,000 per person. The combination of a tax-free property sale and the ability to move up to $600,000 per couple into superannuation is one of the more significant tax planning opportunities available at retirement.
What records are needed to support a CGT main residence exemption?
The main residence exemption is not self-executing — it requires accurate records of ownership dates, periods of use, income-producing arrangements, and residence. Many of the calculations that determine the extent of exemption depend on knowing precise dates: when you moved in, when the property was first rented, when you returned. For any property with a complex history — periods of absence, income use, co-ownership, or inheritance — the CGT calculation on eventual sale is best prepared with the help of an accountant familiar with the rules.
Key takeaways
- The full CGT main residence exemption applies where the property has been the owner's main residence for the entire ownership period, has not been used to produce income, and the owner has been an Australian tax resident throughout. Where any condition is not met, partial exemption applies — the proportion of the gain attributable to non-main-residence use is taxable, though the 50% CGT discount applies for assets held more than 12 months.
- The absence rule (ITAA 1997 s.118-145) allows the property to be treated as the main residence during an absence of up to six years if rented, or indefinitely if left vacant. Only one property can be the main residence at any time — establishing a second property as the main residence during an absence ends the original property's exempt status from that point.
- Income-producing use — renting a room, operating a home-based business with a dedicated deductible space, or short-term rental through platforms such as Airbnb — triggers partial exemption on eventual sale. The pro-rata is based on the proportion of the property used for income production and the period of that use. Records of the arrangement matter for the calculation.
- Where an inherited property was the deceased's main residence and was not used to produce income at death, a beneficiary or estate can sell it within two years of the death and the main residence conditions are treated as met. For post-1985 properties, the cost base resets to market value at the date of death, extinguishing gains accumulated during the deceased's ownership.
- When buying a new home before selling the old one, a transition window of up to six months allows both properties to be treated as the main residence simultaneously. If the old property is sold within six months, the full exemption is preserved. For retirees aged 55 or older, the main residence exemption and a downsizer super contribution of up to $300,000 each operate independently — both can apply to the same sale.
Frequently asked questions
Do I pay capital gains tax when I sell my home in Australia?
Usually no — the CGT main residence exemption (Subdivision 118-B of the ITAA 1997) exempts the capital gain on selling your principal place of residence. The full exemption applies where you lived in the property for your entire ownership period and did not use it to produce income. Where either condition is not fully met, a partial exemption applies: only the proportion of the gain attributable to main-residence use is exempt, while the rest is taxable at your marginal rate (after applying the 50% CGT discount for assets held more than 12 months).
How long can I be absent from my home before I lose the CGT exemption?
If the property is left vacant during the absence — not rented and not used to produce income — there is no time limit. You can be away indefinitely and still treat the property as your main residence, provided you do not establish another property as your main residence during that time. If the property is rented during the absence, the main residence treatment can continue for up to six years. Note that only one property can be the main residence at any point, so acquiring and moving into a different property during the absence ends the original property's exempt status.
I rented a room in my home for a few years. Does this affect my CGT exemption when I sell?
Yes — renting a room constitutes income-producing use and triggers partial exemption. The calculation is a pro-rata based on the proportion of the property used for income production and the period of that use. For example, a property owned for 20 years where one room out of five was rented for 10 years would have roughly 10% of the total gain exposed to tax (10% of the property × 100% of the ownership period). The taxable portion is then halved by the 50% CGT discount for assets held more than 12 months. Records of when the arrangement started and the area involved are important for accurately calculating the exposure.
I inherited a property — will there be CGT when I sell it?
If the deceased used the property as their main residence and was not using it to produce income at the time of death, and the estate or beneficiary sells it within two years of the death, the main residence exemption applies regardless of what happens to the property in the interim. This gives time for probate and estate administration. If the sale takes longer than two years, the standard partial exemption rules apply from the point the property ceased to be used as the deceased's main residence. For post-1985 properties, the cost base resets to market value at the date of death — any gain during the deceased's ownership disappears for CGT purposes.
Can I use the CGT main residence exemption and make a downsizer contribution from the same sale?
Yes — the two provisions operate independently. The main residence exemption covers the CGT outcome on the sale (eliminating or reducing any taxable gain). The downsizer contribution allows you to contribute up to $300,000 per person ($600,000 per couple) of the sale proceeds to superannuation, provided you are aged 55 or older and have owned the property for at least ten years. Using both together — a CGT-free property sale plus moving substantial capital into the concessionally taxed superannuation environment — is one of the more significant tax planning opportunities available at retirement.