Downsizing and owning two homes at once: the CGT six-month overlap rule

When a retiree downsizes — buying a new, smaller home before selling the old family home — there is almost always a stretch of time when they own two homes at once. On the face of it that looks like a capital gains tax (CGT) problem, because the main residence exemption normally lets only one dwelling be your main residence at any moment, so owning two during the move would seem to expose one of them to tax for the overlap. The good news is that the tax law anticipates exactly this. Where you acquire a new home before you sell your old one, the Australian Taxation Office (ATO) confirms you can treat both as your main residence for up to six months, leaving both fully exempt. For downsizing retirees, that relief is genuinely practical — it takes the pressure off perfectly timing a sale against a purchase, and lets you secure the new home first and sell the old one in an orderly way. This article explains how the rule works, the conditions attached, the trap that most often catches people, and how it dovetails with the downsizer super contribution.

Why can normally only one home be exempt at a time?

The CGT main residence exemption is the cornerstone benefit that means most Australians never pay CGT on the family home — a dwelling that is your main residence for your whole ownership period is generally fully exempt on sale. But the exemption generally covers only one dwelling at a time. During a downsizing move there is usually a window of owning two: the new one, already bought and perhaps moved into, and the old one, not yet sold. Without a specific rule, one of those two would fall outside the exemption for that window, exposing a slice of its eventual gain to tax. The six-month overlap rule is the targeted fix for precisely this situation.

What are the three conditions for the six-month overlap relief?

If you acquire a new home before you dispose of your old one, you can treat both as your main residence for up to six months — but only where three conditions are met. First, you must have lived in your old home as your main residence for a continuous period of at least three months in the 12 months before you disposed of it. Second, you must not have used the old home to produce income — such as rent — in any part of that 12 months when it wasn't your main residence. Third, the new property must actually become your main residence. The two conditions on the old home exist to keep the relief aimed at genuine family-home transitions rather than investment properties. Where all three are satisfied and the old home sells within six months, both homes are fully exempt for the overlap — no CGT on either, despite owning two at once.

What happens if the overlap runs past six months?

The six months is a firm limit. If it takes longer than six months to sell the old home — a slow market, a soft price, delayed renovations — the relief still applies, but only to the six months immediately before you dispose of the old home. For the earlier part of the overlap, when you owned both, you must choose which home to treat as your main residence; the other is then subject to CGT for that earlier period. Choosing the old home for that stretch leaves a slice of the new home's eventual gain taxable; choosing the new home leaves a slice of the old home's gain taxable. That is exactly why the practical aim for a downsizer is to complete the sale of the old home within six months of buying the new one — to stay wholly inside the relief.

What is the income-production trap?

The second condition is the one that most often catches retirees. Because the old home must not have produced income in the 12 months before sale while it wasn't your main residence, renting it out — even briefly — while you wait for a better price can breach the rule and cost you the overlap relief. The same goes for running a home-based business from it or listing it for short-stay accommodation during the overlap. The temptation is real: the old home sits empty, and a few months' rent would help cover bridging-loan interest. But that income can forfeit the exemption on a property carrying a large latent gain, and the rent rarely comes close to the CGT it triggers. The plain advice is to keep the old home vacant — not income-producing — throughout the overlap.

How does this coordinate with the downsizer super contribution?

The overlap rule pairs naturally with the downsizer super contribution, since both attach to the same sale. If you are 55 or older at the time you make the contribution, you can put up to $300,000 each — $600,000 for a couple — from the proceeds of selling your home into super, outside the normal contribution caps, provided you contribute within 90 days of receiving the proceeds (usually settlement). One timing point matters: the age test is met at the moment of the contribution, and needing more time simply to reach age 55 is not a basis for an extension of the 90 days. The overlap rule preserves the CGT exemption on the old home; the downsizer contribution gets the proceeds into super tax-effectively — so for a downsizing retiree the two are best modelled together. The dates do the work in both: keep evidence of when each home was your main residence (utility connections, the electoral roll, removalist invoices) and the settlement date of the old home, since those drive the six-month window and the 90-day contribution deadline alike.

Worked examples

These two cases show the rule in practice. They are illustrative only and not personal advice.

Margaret and John, both 70, sell the family home of 35 years and downsize to a single-level villa. They find the villa first, buy it in February with bridging finance, move in straight away, and put the family home on the market; it settles in May, about three months later. On these facts the overlap rule applies cleanly: they acquired the new home before disposing of the old; the family home was their main residence for well over three months in the prior 12; they kept it vacant while on the market; and the villa became their main residence. The overlap is roughly three months — comfortably within the six-month window — so both homes are fully exempt and there is no CGT on either. On these facts it is also generally rational to explore the downsizer contribution from the proceeds, up to $300,000 each within 90 days of the May settlement, modelled alongside the CGT exemption. The key discipline is simply keeping records of the settlement dates and main-residence evidence.

Brian, 68, buys a new apartment in March to downsize, but his old house won't sell in a soft market. Tempted to cover the bridging-loan interest, he considers renting the old house out for six months while he waits, and it eventually sells the following February — about 11 months after he bought the apartment. On these facts Brian faces two problems. The overlap runs to 11 months, so only the last six before the February sale get the relief; for the earlier roughly five months he must choose which home is his main residence, leaving a partial CGT exposure on the other. More seriously, renting the old house out would breach the income-production condition and can cost the overlap relief altogether, on top of the rented period affecting the main residence exemption in its own right. On these facts the rational course is generally to keep the old house vacant to preserve the exemption, accept that an 11-month overlap brings some partial CGT exposure for the earlier period, and model which home to nominate for that stretch — usually the one accruing the larger gain over it. The temptation to earn rent during a slow sale is exactly the move the rule penalises.

For downsizing retirees, the six-month overlap rule strips most of the CGT timing pressure out of a move — but it rewards planning rather than drift. The sensible shape of a downsize is to secure the new home first, keep the old home vacant, and complete its sale within six months, which delivers a clean, fully exempt transition; let the overlap stretch past six months, or rent the old home to cover costs, and you invite exactly the CGT exposure the rule was written to avoid. Confirm the sequence, watch the six-month window and the three conditions, steer clear of the income-production trap, coordinate the downsizer contribution and its 90-day deadline, and keep the dates and evidence — and a downsize can be both unhurried and tax-free.

Sources

• ATO — Moving to a new main residence (six-month overlap rule)
• ATO — Downsizer super contributions