Why Selling Your Home Is Usually Tax-Free, and When It Is Not
Selling the home you live in is generally free of capital gains tax, under an exemption that covers the dwelling and up to two hectares of the land it sits on. The exemption is close to absolute for someone who has lived in one home the whole time they owned it, and it becomes partial the moment the property is used to produce income or the ownership pattern gets complicated.
- The answer: A dwelling that was your main residence for the whole ownership period, on up to two hectares, is fully exempt from capital gains tax on sale.
- The trap: Producing income from the property — renting a room, running a business from it — makes the exemption partial for that period and that proportion.
- The recommendation: Get a market valuation at the date a property first produces income. That valuation is the cost base for everything afterwards.
Where the AI summary above gets this wrong
"Your main residence is exempt from capital gains tax when you sell it."
That's surface-true. Here's what it misses:
- Only one property can be your main residence at a time — Couples are treated as having a single main residence between them, so two people who each owned a home before the relationship have to choose or apportion.
- The exemption is proportional, not binary — A property that was your home for part of the ownership period and a rental for the rest is exempt for the proportion of days it was your home, not exempt outright.
01 What the full exemption requires
The dwelling has to have been your main residence for the whole period you owned it, must not have been used to produce assessable income, and the land must be no more than two hectares including the area under the dwelling.
Main residence is a question of fact, decided on where you actually lived rather than on an address on a form. The factors include where your possessions are, your mail, your electoral enrolment and the connection of services, and no single one settles it.
A couple has one main residence between them for any period. Where each owned a home, they either nominate one for the whole period or split the exemption between the two properties, which gives each a partial exemption rather than one a full one.
Source: ATO — Capital gains tax
02 Where it becomes partial
Renting the property out, or any part of it, makes the exemption partial. The gain is apportioned by the number of days the dwelling was used to produce income against the total days of ownership, and the income-producing proportion of the floor area where only part was rented.
The six-year absence rule softens this. A dwelling that was your main residence and is then rented out can continue to be treated as your main residence for up to six years, provided you are not treating another dwelling as your main residence at the same time.
Using part of the home for business has the same effect, and claiming an interest deduction for a home office is the usual trigger. Claiming occupancy expenses is what causes the partial exemption; claiming running costs such as electricity does not.
Shows: the taxable portion of a gain on a former home, apportioned by the days it was producing income against the total days you owned it, with the CGT discount applied. Ignores: the six-year absence rule, the market value reset when a home first becomes income-producing, selling costs and capital improvements in the cost base, and any capital losses available.
Source: ATO — CGT discount
03 The cost base rules that follow
Where a dwelling first becomes income-producing after you have lived in it, it is treated as having been acquired at its market value on that date. That reset is favourable, and claiming it requires a valuation from the time, which nobody obtains after the fact for free.
Where the property was income-producing first and became your home later, no reset applies and the original cost base stands, apportioned by days. The two situations look symmetrical and are taxed quite differently.
A partial exemption still qualifies for the 50% CGT discount if the property was held for more than twelve months, so the taxable half of an apportioned gain is halved again — the mechanics are in the negative gearing post where the same discount is applied.
The valuation is the thing to act on, and it has a deadline nobody tells you about. The day a home first earns income, its market value becomes the cost base for everything that follows. Get it valued that month. Reconstructing a valuation years later is expensive, contestable, and usually lower than what the property was actually worth.
FAQ
What is the main residence CGT exemption?
A full exemption from capital gains tax on a dwelling that was your main residence for the whole period you owned it, on up to two hectares of land, and that was not used to produce assessable income.
What is the six-year absence rule?
A dwelling that was your main residence and is then rented out can continue to be treated as your main residence for up to six years, provided you are not treating another dwelling as your main residence for the same period.
Does working from home affect the exemption?
Only if you claim occupancy expenses such as a share of interest or rates. Claiming running costs such as electricity and internet does not make the exemption partial.
Sources
Regulator references
- ATO — Capital gains tax · Australian Taxation Office · 2026Capital gains tax: the events that trigger it and how the gain is worked out.Last verified: 2026-09-07
- ATO — CGT discount · Australian Taxation Office · 2026The CGT discount on assets held beyond the qualifying period, and who can claim it.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.