Understanding the Principal Residence Exemption
Your main home is generally CGT-exempt, but partial use for income or renting it out can create CGT liabilities. Learn how the exemption works.
What is the Principal Residence Exemption?
The principal residence exemption (also called the main residence exemption) allows you to sell your primary home without paying capital gains tax on the profit.
This is one of the most generous tax concessions in Australia and applies to most homeowners when selling their family home.
Full Exemption Requirements
To qualify for a full CGT exemption, your home must meet all of these criteria:
- Used as your main residence: You and your family lived in it as your primary home
- Entire ownership period: It was your main residence for the entire time you owned it
- No income-producing use: You didn't use it to produce assessable income (e.g., rental, business)
- Land size: The land is 2 hectares (approximately 5 acres) or less
- Not used for business: You didn't run a substantial business from the property
You bought a house in 2015 for $600,000, lived in it as your main residence for 9 years, and sold it in 2024 for $1,000,000.
Capital gain: $400,000
CGT payable: $0 (fully exempt)
Partial Exemption (Mixed Use)
If your home was used partly for income-producing activities, you get a partial exemption. The period of time that the property was used for income producing activities will be used to apportion the gain. If only part of your property was used to produce income then an area-based apporitonment will also apply.
- Time-based apportionment: Used when the property's purpose changed over time (e.g., you lived in it then rented it out). Exemption is based on the percentage of time it was your main residence.
- Area-based apportionment: Used when part of the property is physically separated for income-producing purposes while you live in the rest (e.g., granny flat, rental unit, home office with structural modifications). Exemption is based on the percentage of the property used for private purposes.
Partial Exemption Calculation
When part of your property is rented out for part of the ownership period, you need to apply both time-based and area-based apportionment.
Property Details:
Total area: 400m²
Main house: 320m²
Granny flat: 80m² (separate entrance, self-contained)
Ownership Timeline (10 years total):
• 2015–2020 (5 years): Lived in entire property, granny flat unused
• 2020–2025 (5 years): Lived in main house, rented out granny flat
Purchase price: $500,000
Sale price: $900,000
Capital gain: $400,000
Step 1: Calculate time-based exemption percentage
Years with no income-producing use: 5 years ÷ 10 total years = 50%
Years with granny flat rented: 5 years ÷ 10 total years = 50%
Step 2: Apply area-based apportionment to rental period
For the 5 years when granny flat was rented:
• Granny flat area: 80m² ÷ 400m² = 20% (taxable portion)
• Main house area: 320m² ÷ 400m² = 80% (exempt portion)
Step 3: Calculate total exemption
• First 5 years (entire property personal use): 50% of gain × 100% exempt = 50% of total gain exempt
• Last 5 years (granny flat rented): 50% of gain × 80% exempt = 40% of total gain exempt
Total CGT exemption: 50% + 40% = 90%
Taxable portion: 10%
Calculate CGT:
Capital gain: $400,000
Taxable portion (10%): $40,000
Apply 50% CGT discount (held >12 months): $20,000 added to taxable income
At 37% marginal tax rate: $20,000 × 37% = $7,400 CGT payable
Key Takeaway
When you rent out only part of your property for part of the time, you still get substantial CGT exemption. In this example, 90% of the gain remains exempt even though the granny flat was rented for 5 years.
- The room is not exclusively used for business (you use it for other purposes too)
- No structural changes were made to separate it
- It remains part of your ordinary household
Simple Partial Exemption Calculator
Use this quick calculator to estimate the taxable CGT portion when only part of your home was rented for part of the ownership period.
Estimate taxable CGT portion
Overlap Period (Up to 6 Months)
When you're transitioning from one main residence to another, you can treat both properties as your main residence for up to 6 months. This is useful when:
- Building a new home to move into
- Buying a new home before selling your current home
- Renovating your new home before moving in
The 6-Year Absence Rule
If you move out of your main residence and rent it out, you can still treat it as your main residence for CGT purposes for up to 6 years.
Conditions:
- The dwelling was your main residence before you moved out
- You don't claim another property as your main residence during this period (unless it's a new home you're building or buying)
- The property is rented or genuinely available for rent
Mint's Fresh Take
The 6-year rule is one of the most powerful CGT strategies. If you sell within 6 years of moving out and renting, the entire capital gain remains CGT-exempt.
Establishing a Dwelling as Your Main Residence
You can only have one main residence at a time (per couple/family). The ATO considers several factors:
- Where you and your family physically live most of the time
- Where your personal belongings are kept
- Your mailing address and where mail is delivered
- Where your family attends school or work
- Your voter registration address
- Connection of utilities and services
Land Size Limit (2 Hectares)
The principal residence exemption applies to your dwelling and up to 2 hectares of surrounding land.
- Under 2 hectares: Full exemption for the entire property
- Over 2 hectares: Only the dwelling and 2 hectares are exempt; excess land is subject to CGT
You own a 5-hectare rural property with your home on it.
- 2 hectares (including the dwelling): CGT-exempt
- 3 hectares excess land: Subject to CGT on its portion of the capital gain
Mint's Fresh Take:
If the excess land is used for maintaining the dwelling (e.g., large gardens, horse paddocks for personal use), you may be able to claim the full exemption. Consult a tax professional for properties over 2 hectares.
Temporary Absences
You can be temporarily absent from your main residence and still maintain the exemption:
- Any period: If the dwelling is not used to produce income (e.g., vacant while traveling) or if you're absent due to employment, illness, or other circumstances beyond your control
- Up to 6 years: If the property is rented out during your absence
Building or Renovating Your Main Residence
Special rules apply when building or substantially renovating:
- You can treat the dwelling as your main residence from when you start building (or renovating) if you move in as soon as practicable after completion
- You can continue to treat your existing home as your main residence during this period
Inherited Properties
If you inherit a property that was the deceased's main residence:
- The property receives a cost base "step-up" to market value at the date of death
- If you sell within 2 years of death, any gain from date of death to sale is usually CGT-exempt
- If you move in and make it your main residence, you can claim the exemption
Record Keeping
To substantiate your principal residence exemption claim, keep:
- Purchase and sale contracts
- Utility bills showing occupancy dates
- Electoral roll records
- School enrollment records
- Records of rental income (if partially rented)
- Records of any business use or structural changes
Mint's Takeaway
- Your main home is CGT-exempt if used solely as your residence, on land ≤2 hectares, and not used to produce income.
- Partial exemptions apply if you rent out part of the property (area-based) or for part of the ownership period (time-based).
- The 6-year absence rule allows you to rent out your former home and still claim the exemption if you sell within 6 years.
- You can only have one main residence at a time – choose carefully if you own multiple properties.
- Temporary absences for work, travel, or illness don't disqualify you from the exemption.
- Keep records of occupancy, utility bills, and rental income to substantiate your exemption claim.
Mint helps you track occupancy periods, rental income, and mixed-use apportionment to accurately calculate your CGT liability.