Considering renting out your family home? You could be eligible for one of the most generous tax breaks in Australia—but only if you follow the 6-year rule.

In this episode, Mark and Shani break down how this CGT exemption works, who it applies to, and what happens if you get it wrong.From a real-life example that cost a reader hundreds of thousands in tax, to a full breakdown of the rule using Shani’s friend and his Darlinghurst property, this episode helps you make smarter property and tax decisions.

Topics covered:

  • What is the 6-year CGT exemption rule?
  • How it works for retirees, upgraders, and people moving for work
  • What happens if you rent your home for more than six years
  • How tax is calculated (step-by-step example)
  • How to avoid costly mistakes by keeping the right records

Further reading from Shani’s article.

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We’ve shared our journeys with you, and you’ve shared back. We’ve listened to what you’re after and created a companion for your investing journey—Invest Your Way. Invest Your Way is a book that focuses on the investor, instead of the investments. It is a guide to successful investing, with actionable insights and practical applications.

The book is currently in presale which is an important time to build momentum. If anyone would like to support this project you can buy the book now. Thanks in advance!

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You’re able to find the transcript of the episode below:

Mark LaMonica: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature, does not take into consideration your personal situation, circumstances, or needs.

Shani Jayamanne: Mark.

LaMonica: Shani.

Jayamanne: You have continued your reign as a squash champion.

LaMonica: I don’t know how to respond to that.

Jayamanne: You played last night and you won again.

LaMonica: I did.

Jayamanne: That’s exciting. Tell us about it. You’re part of a new tournament now.

LaMonica: Yes. So we’ve moved into the winter season. So although the other one’s still going on.

Jayamanne: Does it matter what season it is if you’re indoors?

LaMonica: Well, it doesn’t. They just arrange them around seasons.

Jayamanne: Oh, I see.

LaMonica: Okay. But the autumn one is still happening. We’re in the playoffs tomorrow. The finals, as you Australians would say. The new one started last night. Everybody on my team and the team that we played were all seemingly in their 20s. And then there’s this old man. So I made this ill-fated decision to dive for a ball, which of course I was unable to hit. And there’s like this audible gasp from all the 20-year-olds being like, did this guy break a hip? Are we going to have to call the ambulance?

Jayamanne: So you think experience won out?

LaMonica: I don’t know. I think it was mostly luck.

Jayamanne: Okay. Well, what’s going to happen now when you become too big for Morningstar and you have to leave? Who am I going to do this podcast with?

LaMonica: Where am I leaving to go?

Jayamanne: To play squash professionally.

LaMonica: I am in the lowest level of the league. There’s like eight more grades just to get to the top. Like, I don’t know what.

Jayamanne: But you’re a rising star. You’re rising really quickly. So who knows where you’ll be.

LaMonica: That’s me. You know, I went to uni in this horrible place, Hartford, Connecticut. And it was known they had to tag the city even though it was like falling apart. And they called it Connecticut’s Rising Star, which in Connecticut context might have actually made sense. But let’s get into this.

Jayamanne: Well, we have a short episode today, but it’s one that’s related to two of Aussie investors’ favorite topics, tax and property. So hopefully you’ll find it interesting.

LaMonica: Yes. And it was prompted by an email that I received from a reader of one of my articles. And she had not sought professional tax advice about her primary place of residence. And it was a mistake that cost her hundreds of thousands of dollars. And since Shani loves tax, you…

Jayamanne: I’m not an expert.

LaMonica: You are not an expert, but you jumped right on it. You’re a tax aficionado.

Jayamanne: Yes. So she rented out her family home. And if you do it correctly, it is one of the most generous tax breaks available for Australian property owners. But if it’s not done right, you can cost yourself.

LaMonica: And we mentioned, of course, not that we have to mention it, but Australian’s are obviously very interested in property. And that’s because it’s not uncommon for the family home to be one of your best performing assets.

Jayamanne: So capital growth on residential property in Australia has skyrocketed along with rental prices. According to CoreLogic, Australian dwelling values rose more than 70% over the last decade and 39.1% in the five years to March 2025. Median national rents have increased by 37.6% in the five years to March 2025.

LaMonica: People are probably shocked. They did not realize that property is expensive in Australia. And, obviously one of the big drivers of this is supply remains really tight. And so this makes renting out the family home something that’s really attractive. So either in retirement to downsize or I guess at other points in your life, which is what we’re going to talk about today.

Jayamanne: But if you don’t properly manage it, you may lose your CGT exemption. Taxes reduce the total cost, the total gain from the sale of your property drastically.

LaMonica: And again, this isn’t a theoretical exercise. The Morningstar reader that wrote into me said that she was taken by surprise that this rule existed. And the rule is called the six year rule. And if she knew about it beforehand, she said she would have changed the way that she approached her living circumstances, because as we said, it would have saved her hundreds of thousands of dollars on her tax bill.

Jayamanne: So let’s not bury the lead here. Let’s talk about what the six year rule is, how it works and what it means for property owners.

LaMonica: Okay. So the six year rule is a provision that allows you to treat your home as an investment property and still receive the capital gains exemption when you sell your primary place of residence. So the condition is that the term you rent out your home is a maximum of guess what, six years exactly.

Jayamanne: So let’s go through a couple of examples where this would be advantageous. One would be if you were to retire and you wanted to downsize, you’re able to go into a new property and rent out your property for a period of six years before you sell. You want to make sure that any tree change or sea change is right for you before you get rid of the family home.

LaMonica: Or another example is that maybe there’s an opportunity overseas or even interstate that you want to go for let’s say a stint of five years and work somewhere else. You’re able to rent that property out temporarily and maintain that CGT exemption for up to six years of course.

Jayamanne: So that means that upon the sale of the property, you don’t have to pay CGT for those six years even though you’ve collected income from the property. This is as long as you don’t nominate another property as your primary place of residence or PPR during that rental term.

LaMonica: So one other point to note about this is that there is no time limit if you do not collect income from the property. So a couple of scenarios where this may happen is if it’s left vacant or if your children use the property when you downsize. So again, this only applies if you don’t nominate another property as your PPR.

William Ton: I’m Will producer of Investing Compass and here is this week’s must reads on Morningstar.com.au. Mark’s Unconventional Wisdom column this week, he looks at his ETF pick for Aussie equity exposure in his portfolio. Part of being a successful investor is understanding why you are investing in a particular investment and playing devil’s advocate to ensure that you are not investing with bias. Mark runs through this exercise to ensure that this investment is still the right pick for him and his goals.

Morningstar and Vanguard have both recently conducted research on where financial advisors add value. In Shani’s Future Focus column, she looks at the aspects where advisors can improve investor returns and how self-advised investors can improve their outcomes based on the results. Individuals are often faced with an overwhelming number of investment options.

As someone who works in the finance industry with an abundance of research, at her disposal Sim also experiences this paradox of choice. Despite this, her column explores why she chooses not to invest in individual stocks and why this method aligns with her goals. Phil Fisher was a legendary investor and writer that Warren Buffett cites as a key influence. In the next edition of his Bookworm column, Joseph taps a lesser-known Fisher book from 1975 for wisdom. He unearths the first quality that Fisher sought in a conservative investment. These articles and more there available in the show notes. Now let’s get back to Mark and Shani.

Jayamanne: So what does this mean for homeowners and how can you take advantage of the provision?

LaMonica: Well we’ve spoken a couple times on this podcast about our personal situations and our views of property. So we both don’t have Australian property as investments and that’s mainly because of the cost. But a large reason that there’s some reluctance around purchasing a property is because you lose flexibility in your life.

Jayamanne: It’s a huge cost and it is a large asset. These assets also have significant frictional costs if you decide to have a change in lifestyle. For example, moving for work, wanting to move closer to family, interstate for a little while.

LaMonica: Or further away.

Jayamanne: Or further away. A pandemic hits and you want to move to a property that has more outdoor space or space in general. There are lots of instances where you have to think twice or thrice about your decision when you own property and most of the time it restricts your decisions and options.

LaMonica: That’s right. And for a lot of people getting a mortgage restricts your life in many ways. It restricts your cash flow for decades. It restricts your ability to move around for work or lifestyle opportunity. It removes flexibility for life decisions across multiple dimensions.

Jayamanne: And the six year rule adds some breathing room to the restrictions that a mortgage and a house impose on you. For younger workers it allows you to take advantage of employment opportunities in other locations. For retirees it allows you to downsize or move to another location to try before committing in retirement. And a large group that this provision also impacts are those who are looking to upgrade their home and keep their first home as an investment. Not understanding this rule can result in unexpected CGT liabilities.

LaMonica: Okay so we’ve gone through how people can take advantage of this rule and who it may suit. Let’s go through how it works and how it may impact an individual.

Jayamanne: And I’ve used my friend Cornelius in this example. When you write these articles you’ve got to think of a new name for each example. So now I’m just going to go through my friends.

LaMonica: Okay but he’s a real person.

Jayamanne: He’s a real person.

LaMonica: I’ve hung out with him.

Jayamanne: Yes.

LaMonica: How does he feel about this?

Jayamanne: He feels famous. I don’t think he realizes how little people read my articles.

LaMonica: Well you know. Still. Yes. Famous enough.

Jayamanne: So before we do go through this, we do acknowledge it is difficult to keep up with a numerical example through audio and video. So I’ve got an article about this topic as well that we’ll put in the episode notes.

LaMonica: Okay so Cornelius buys a house in Darlinghurst in January of 2015 for $900,000. So he lives in this house as his primary place of residence or PPR until January 2020. So that’s five years obviously. Cornelius receives an offer to move overseas for work. So he rents out the property in January of 2020. Cornelius returns to Sydney in January 2028. So that is eight years later. He sells the property for $1.8 million. So good for him. He’s doubled his money.

Jayamanne: Let’s take a look at how much tax is payable. The six year exemption provides some relief. The period from January 2020 to 2026 is CGT exempt. CGT’s tax is payable on the period after between 2026 and 2028.

LaMonica: So CGT is calculated on the market rate or the cost base from when the property is rented out. So in 2020, let’s say the property was worth $1.2 million. The gain that is assessed is $1.8 million minus $1.2 million. So $600,000.

Jayamanne: And the taxable capital gain was two years. So divided by the eight years, 25%, multiplied by the gain of $600,000. So that’s $150,000.

LaMonica: But Cornelius is eligible for the CGT discount of 50%. So that reduces the taxable gain by 50%. So total amount added to Cornelius’ taxable income for the 2027-2028 financial year is $75,000.

Jayamanne: So if he’s on the highest marginal tax rate, his tax liability is $33,750.

LaMonica: So let’s say Cornelius moved back in January 2025 or any time before the six year rule was up. That whole gain on his house is tax free. So the expenses are also deductible during the six years as investment properties are.

Jayamanne: So if the six year rule didn’t exist, Cornelius would still receive that 50% CGT discount. But he’d have to pay his marginal tax rate on $450,000. So it could be up to $202,500 at the highest marginal tax rate.

LaMonica: Which is a lot.

Jayamanne: It’s a big difference.

LaMonica: We’ve taken an example from the ATO website to use as a basis for the one we just ran through. They have multiple different examples with varying circumstances that can help you get a clear picture of what might apply to you.

Jayamanne: So have a look at the website. It’ll give you a few more calculations with different scenarios.

LaMonica: Shani goes to the ATO website every day. But not as part of work, just for fun, after work. So send me an email and Shani can send you to the fun sections. So there are a couple of different ways to ensure that this provision works for you. If you’re looking to move out of your primary place of residence, keep good records.

Jayamanne: Keep records of the dates that you purchased, moved into the property and rent it out.

LaMonica: Keep records of your designation of your property as your primary place of residence for the duration of the period. Ensure that for any tax purposes, council bills or payments that the property you are living in is not claimed as your PPR. Doing so will void the designation on your original property that you are renting out.

Jayamanne: If you move back into the property, you may be eligible for the six-year period to reset. So it is highly recommended to seek professional tax advice. Doing so may be able to structure this in a way that works better for your circumstances and saves you a significant amount of money in the long run.

LaMonica: And as we said at the beginning of this episode, the six-year rule is one of the most generous provisions in Australian tax policy, which since it’s Australia, of course, has been applied to property. It is also easy to get it wrong. Ensure that you are methodical about using it and that your moves are properly planned and documented.

Jayamanne: And the purpose of this policy is not to be a tax loophole.

LaMonica: Despite the commentary.

Jayamanne: It is to provide you with the flexibility to pursue lifestyle changes that often owning a property can take away from you. So do use it to your benefit.

LaMonica: Well, that’s quite a take on it. There we go.

Jayamanne: Do you want to share your take before this ends, Mark?

LaMonica: Well, I don’t like all taxes reduce the flexibility in your life. But anyway, we choose to exempt some and choose to put them.

Jayamanne: Just join the cult already, Mark. You’ve got your citizenship.

LaMonica: I will not be joining the cult. But thank you guys very much for listening. I really appreciate it. We really appreciate it.