Capital gains tax when you sell: the main residence exemption's limits

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Kooky

Builder of Shaka, the payment router that pays every agent their commission on closing date.

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Most Queenslanders who sell a home pay no tax on the profit, however large it is. The reason is a single rule in federal tax law, the main residence exemption, which removes the family home from capital gains tax. It is so widely relied on that many owners assume it covers any property they have ever lived in. It does not. The exemption has conditions, and the common events of a working life, a transfer interstate, a tenant in the spare room, a business run from the garage, an inherited house, can each turn a fully exempt home into a partly taxable one.

This guide sets out how the exemption works, using the Australian Taxation Office's published guidance as it stood in mid-July 2026: what counts as a main residence, the three conditions for a full exemption, what happens when an owner moves out or owns two homes at once, how a partial exemption is calculated, how inherited homes are treated, and what the law passed in June 2026 changes from 1 July 2027. Capital gains tax is a federal tax and the rules are the same in every state; the last section compares them with Queensland's own tests for a home, which use the same word and mean something different.

Australian Taxation Office, guidance on the main residence exemption, updated 22 June 2026.

Why the exemption matters

A capital gain is, broadly, the difference between what a property cost and what it sells for. The gain is added to the owner's income in the year the contract of sale is signed and taxed at their marginal rate. An individual who has owned the asset for at least twelve months currently counts only half the gain, under the 50 per cent discount.

On a home bought for $450,000 and sold for $950,000, the gain before costs is $500,000. If none of it were exempt, the discount would reduce the amount added to income to $250,000. At a marginal rate of 47 per cent, which applies to the highest incomes once the Medicare levy is counted, the tax on that would be $117,500. Those figures are an illustration, not anyone's bill, but they show the size of what the exemption protects. With the exemption in full, the gain is simply disregarded.

What counts as a main residence

The exemption follows the person and the facts, not a registration or a declaration. The ATO lists what it takes into account in deciding whether a dwelling is someone's main residence: whether the owner and their family live in it, whether their personal belongings are in it, whether it is the address their mail is delivered to and the address on the electoral roll, and whether services such as gas and power are connected. The length of time lived there and the intention in occupying it also count.

A dwelling is given a wide meaning. The ATO's list includes a house or cottage, an apartment or flat, a strata title unit, a unit in a retirement village, and a caravan, houseboat or other mobile home. A garage or storeroom is covered if it is sold with a flat or unit and was used for private or domestic purposes.

Vacant land is not a dwelling, and a holiday house visited for a few weeks a year is not a main residence however fond the family is of it. A person can generally have only one main residence at a time, with a limited exception while moving house.

The three conditions for a full exemption

The ATO states the test for a full exemption in three parts. The dwelling must have been the home of the owner, their partner and other dependants for the whole period they have owned it. It must not have been used to produce income, which the ATO explains as not having run a business from it, rented it out or "flipped" it. And it must be on land of two hectares or less.

Each condition has an edge that catches people.

The whole period of ownership starts when the property is acquired, not when the owner gets around to moving in. The ATO's guidance says a home qualifies from the time it is acquired provided the owner moves in as soon as practicable. A delay caused by illness or other unforeseen circumstances does not break the exemption, provided the owner moves in once the obstacle is gone. Choosing to leave an existing tenant in place for a year is a different matter.

Income use covers more than a formal lease. A room let to a boarder, a granny flat with a tenant and regular short stays through a booking platform are all rent.

The land limit matters on acreage. The exemption covers the dwelling and up to two hectares of land used with it. On a larger property the owner chooses which two hectares, and the gain on the rest is taxable.

Moving in, moving out and owning two homes at once

Buying the next home before selling the last is normal, and the law allows for it. The ATO's guidance says both properties can be treated as the owner's main residence for up to six months where three conditions are met: the owner lived in the old home as their main residence for a continuous period of at least three months in the twelve months before disposing of it; the old home was not used to produce income in any part of those twelve months; and the new property becomes the owner's main residence.

If the old home takes longer than six months to sell, the overlap is not lost, but it is limited. Both homes are exempt only for the last six months before the old one is disposed of. For the period before that, the owner chooses which of the two was the main residence, and the other is taxable for that time.

The second condition is the one that bites in a slow market. An owner who moves into the new house and rents out the old one while waiting for a buyer has used it to produce income within the twelve months, and the six-month concession does not apply.

The six-year absence rule

An owner who moves out of a home does not have to give up the exemption. The ATO describes a choice: the owner can continue to treat the former home as their main residence after they stop living in it. If the property is not used to produce income, the choice can run indefinitely. If it is rented, the choice can cover up to six years.

The price of the choice is exclusivity. While it is in force the owner cannot treat any other property as their main residence, apart from the six-month overlap when moving. A couple who move from Brisbane to Townsville for work, rent out the Brisbane house and buy a home in Townsville must decide which of the two is their main residence for the years in between. The other will carry a taxable gain for that period.

Two details make the rule more flexible than it sounds. If the owner is absent more than once, the six-year period applies to each absence, so moving back in and out again starts a fresh six years. And the owner can choose when the period covered by the choice stops.

The choice is made when the tax return for the year of sale is prepared, by treating the gain as exempt or not. Nothing is lodged when the owner moves out. That is convenient, but it means the records have to survive: dates of moving out and back, tenancy periods, and where the owner was living in the meantime.

Where a rented former home is held beyond six years, the gain is apportioned. The ATO's guidance includes a worked example of an apartment with a total gain of $320,000, of which $121,581 was assessable after the six-year rule was applied.

Renting out a room or running a business from home

Using part of a home to earn income while living in it produces a partial exemption. The ATO's test is the interest deductibility test: the owner asks whether they would have been allowed a deduction for interest on a home loan for the part used to produce income, had they borrowed to buy the home. To the extent the answer is yes, the home is subject to capital gains tax.

For a rented room, the taxable share follows the floor area let and the time it was let. For a business, the ATO draws a line that matters to the many people who work from home. A home is used for business where it is the principal place of business and space is set aside just for that purpose. Merely working from home occasionally, or by choice, does not qualify. An employee with a laptop at the kitchen table has not made their home partly taxable. A physiotherapist with a dedicated treatment room and a separate entrance has.

The ATO's examples show the formula at work. In the first, part of a house was rented for the whole of a 23-year ownership: 20 per cent of the floor area exclusively, and a 30 per cent shared area counted at half, for a taxable share of 35 per cent. In the second, a home business occupied 40 per cent of a house for 1,370 of the 2,739 days counted.

A home that became a rental, or began as one

The order of events changes the calculation.

Where a property is rented out first and lived in later, the days of tenancy are taxable in proportion to the days of ownership, as in the third and fourth rows of the table. There is no six-year protection, because that rule applies only to a property that was first the owner's main residence.

Where a home is lived in first and used for income later, a special rule resets the starting point.

The rule works in the owner's favour when the home had already grown in value before the income use began, because that earlier growth drops out. Its cost is practical. A valuation obtained at the time is far easier to defend than one reconstructed years later, and many owners do not think of the day a tenant moves in as a day for a valuer.

Inherited homes

A dwelling inherited from someone whose home it was can be sold free of capital gains tax if the conditions are met, and the central one is time. The ATO's guidance says the property must be disposed of under a contract that settles within two years of the death. Within that period the exemption applies regardless of whether the heirs lived in the property or rented it out.

The two years can be extended where the sale is delayed by exceptional circumstances outside the beneficiary's control. Beyond the two years, the exemption can continue only while the dwelling is the main residence of certain people, such as a surviving spouse or a beneficiary.

The deceased's own history matters. The full exemption depends on the property having been their main residence and not used to produce income, and the rules differ according to whether they acquired it before or after capital gains tax began on 20 September 1985. One hard edge: if the former owner had been a foreign resident for more than six years when they died, the ATO says the main residence exemption cannot be claimed.

For families, the lesson is that the two-year period is counted to settlement, not to the listing or the contract, and that estates held jointly by siblings who cannot agree are the ones that drift past it.

Foreign residents and the certificate needed at sale

The exemption is, with limited exceptions, for Australian residents. The ATO's eligibility guidance says a person who is a foreign resident when the sale occurs may not be entitled to claim it. An owner who has moved overseas and is thinking of selling the former family home should check their residency position before signing a contract, because the date of the contract is the date the test is applied.

A related rule touches every seller, resident or not. Under the foreign resident capital gains withholding regime, the ATO says that from 1 January 2025 a rate of 15 per cent applies to the value of all property, and that all Australian residents selling Australian real property must have a clearance certificate. If a seller has not given the buyer a certificate by settlement, the buyer must withhold that amount and pay it to the ATO, and the seller recovers it only by lodging a tax return.

The certificate is free, it is valid for twelve months, each co-owner needs their own, and the ATO says applications can take up to 28 days. It has nothing to do with whether the sale is taxable. A couple selling a fully exempt family home still need one each.

What changes on 1 July 2027, and what does not

Federal Parliament passed changes to capital gains tax in June 2026, and the ATO's page on the measures, updated on 29 June, confirms they are now law. From 1 July 2027 the 50 per cent discount for individuals, trusts and partnerships is replaced by indexation of the cost base and a 30 per cent minimum tax rate on capital gains. The changes apply only to gains that accrue after 1 July 2027.

What changes is the treatment of the taxable part of a partly exempt home, and of any property that is not a home. Under the transition described in the explainer, the gain built up to 1 July 2027 keeps the 50 per cent discount, and growth after that date is indexed for inflation and subject to the minimum tax. The value at 1 July 2027 is set by a valuation or by an apportionment formula.

Every ATO example quoted in this guide ends by halving the assessable gain. For sales after 1 July 2027 that last step will apply only to the part of the gain that arose before that date. The guidance published so far does not illustrate the full calculation for a home that was partly income-producing across both periods.

One word, three tests in Queensland

A Queensland owner meets the idea of a home in three tax systems, and satisfying one says nothing about the others.

For capital gains tax, the ATO looks at the whole period of ownership and allows the absence and overlap rules described above. For the State's transfer duty home concession, the Queensland Revenue Office requires the buyer to move in within one year of settlement and restricts selling or leasing the whole property for a year after that. For the State's land tax home exemption, the same office looks at whether the property was used as the owner's home between 1 January and 30 June of the year in question.

An owner who moves out and rents the house can therefore be inside the six-year rule for capital gains tax, long past the occupancy period for transfer duty, and outside the land tax exemption from the next 30 June. Each tax asks its own question.

None of this replaces advice on a particular sale. Residency, the way a property is owned, the records kept and the dates of each change of use all bear on the result, and a registered tax agent is the person to apply the rules to the facts.

Kooky, from Shaka

Kooky edits Queensland Estate and builds Shaka, the payment router he made for Queensland property professionals. One payment comes in, and every agent, agency and party in the deal receives their signed share on closing date.

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