The 6 Year Rule Capital Gains Tax Exemption

The 6 Year Rule Capital Gains Tax Exemption


The ATO’s 6-Year Rule allows homeowners to rent their home and qualify for a full CGT exemption while earning rental income so long as they meet certain conditions.

What the 6-Year Rule Actually Means

Your main residence (the home you live in) is generally exempt from CGT when you sell. However, once you move out and rent the property, it technically becomes an investment which could trigger capital gains tax when sold.

The 6-Year Rule allows you to continue treating that property as your main residence for up to six years after you move out, provided:

  1. You do not claim another property as your main residence during that time; and
  2. You resume living in it before selling if you want to reset the 6-year period.

If you move back in, the clock resets, and you can start a new six-year period if you move out again later.

Example

Sarah buys her Sydney home in 2018 for $800,000 and lives there until 2022. She then moves interstate for work and rents the property for five years.

In 2027, she sells the property for $1.2 million.

Although she rented it for five years, the 6-Year Rule applies, and the entire $400,000 gain is CGT-freebecause she sold within the six-year window and didn’t claim another home as her main residence during that time.

If she had rented it for seven years, however, the gain for the extra year (one-sixth) would be taxable, because it exceeded the limit.

Partial Exemptions When You Rent for More Than Six Years

If you rent out your property for longer than six years, you can still receive a partial Capital Gains Tax exemption the ATO simply requires you to apportion the gain between the time it qualified as your main residence and the period it didn’t.

For example:

  • You lived in your home for 4 years,
  • Then rented it out for 7 years before selling.

Because the property was rented for one year beyond the six-year limit, one-seventh (1/7) of the total capital gain will be subject to CGT, while six-sevenths (6/7) remains exempt.

What If You Don’t Rent It Out?

If you move out but leave the property vacant, the main-residence exemption can apply indefinitely and there’s no six-year limit.

Common Traps to Avoid

  1. Claiming another main residence. You can only nominate one home at a time. If you buy and live in a second property, your 6 Year Rule ends for the first.
  2. Renovating or rebuilding. Major structural changes or redevelopment could affect your CGT status.
  3. Not keeping records. Keep purchase, sale and rental documents, as well as dates you moved in and out to support your CGT calculation.
  4. Selling after six years without returning. Even one day beyond six years can reduce your exemption significantly.

Opportunities for Homeowners

Used correctly, the 6-Year Rule can help you:

  • Generate rental income without sacrificing your tax-free status on sale.
  • Maintain flexibility if you move for work or family reasons.
  • Build wealth through property while staying compliant with ATO rules.

For example, homeowners who move out for career opportunities or to trial a new city before selling, the 6-Year Rule offers a tax-efficient bridge between lifestyle and investment goals.

How to Apply It Correctly

  • Keep a timeline of when you lived in and rented the property.
  • Record rental income and expenses separately.
  • Get professional CGT advice before selling. The timing of the contract date (not settlement date) is what the ATO considers for the 6 year limit.
  • Review your main-residence nomination if you own multiple properties

Talk to Cashflow Financial

The 6-Year Rule can be a powerful tool for homeowners, but personalised advice is essential. At Cashflow Financial, we help clients maximise their tax exemptions, plan property sales strategically, and ensure every decision aligns with their long-term wealth goals.

Get in touch today with one of our accountants. We are here to help.