Future Focus: One of the most generous tax breaks in Australia

A reader recently wrote in about a mistake she made that lost her hundreds of thousands of dollars when she rented out her family home. However, if done correctly, she could have taken advantage of one of the most generous tax breaks available for Australian property owners.

It is not uncommon for the family home to inadvertently become one of your best performing assets. 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 – and supply remains tight.

Renting out the family home has become an extremely attractive proposition – either in retirement, or to downsize.

However, if not properly managed, you may lose your CGT exemption. Taxes reduce the total gain from the sale of your property drastically.

This is not a theoretical situation. As previously mentioned, we recently had a Morningstar reader write in saying that she was taken by surprise that this rule existed. Knowing about it would have changed her approach and saved her hundreds of thousands of dollars on her tax bill.

The 6-year rule

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.

The condition is that the term you rent out your home does not exceed a maximum of six years.

For example, you retire and want to downsize. Or, you take an overseas opportunity for work, hoping to be back in five years’ time. You are able to rent the property out temporarily and continue to treat it as your main residence for up to six years.

This means that upon 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 (PPR) during the rental term.

There is no time limit if you do not collect income from the property. For example, if it is left vacant, or your children use the property when you downsize. Again, this only applies if you don’t nominate another property as your PPR.

How to take advantage of the provision

For many, getting a mortgage restricts your life in many ways.

It restricts your cashflow for decades. It restricts your ability to move around for work or lifestyle opportunities. It removes flexibility for life decisions in many dimensions.

The six-year rule adds some breathing room to the restrictions that a mortgage and a house impose on you. For young 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.

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 Capital Gains Tax (CGT) liabilities.

How it works

Let’s look at an example of how this may impact an individual.

Cornelius buys a house in Darlinghurst in January 2015 for $900,000. He lives in this house as his Primary Place of Residence (PPR) until January 2020, for five years.

He receives an offer to move overseas for work and rents the property in January 2020.

Cornelius returns to Sydney in January 2028 and sells the property for $1.8 million.

How much tax is payable?

The six-year exemption provides some relief. The period from January 2020 to 2026 is CGT exempt. CGT tax is payable on the period after - between 2026 and 2028.

Cornelius owned the property from 2015 to 2028 (13 years). 13 years/2 years subject to tax = 15.38% of the gain.

The total capital gain is $1,800,000 - $900,000 = $900,000

The taxable gain is $900,000*15.38% = $138,420

Cornelius is eligible for the CGT discount, which reduced the taxable gain by 50%.

Total amount added to Cornelius’ taxable income for the 2027-2028 Financial Year is $69,210.

If Cornelius is on the highest marginal tax rate, that is a tax liability of $31,144.50.

If Cornelius moved back in January 2025 – or any time before the six-year rule was up, the whole gain is tax free. The expenses are also deductible during the time the property is rented out, as is available to investment properties. I’ve written before on the most common deductions that are missed by property investors.

If the six-year rule didn’t exist Cornelius would still receive the 50% CGT discount but would have to pay his marginal tax rate on $450,000. This could be up to $202,500 at the highest marginal tax rate.

Ways to ensure that this provision works for you

If you are looking to move out of your PPR, keep good records.

Keep records of:

The dates that you purchase, move into the property, and rent it out.
Your designation of your property as your PPR for the duration of the period, i.e. 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.
If you move back into the property, you may be eligible for the six-year period to reset. It is highly recommended to seek professional tax advice. Doing so may be able to structure this in a way that works best for your circumstances and save you a significant amount of money in the long run.

Final thoughts

The six-year rule is one of the most generous provisions in Australian tax policy. 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.

The purpose of this policy is not to be a tax loophole. It is to provide you with the flexibility to pursue lifestyle changes that often owning a property can take away from you. Use it to your benefit.