What is the six year CGT property investment rule?
Dominic Beattie
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- The 'six-year rule' allows homeowners to rent out their principal place of residence without having to pay capital gains tax when they sell it down the track
- It's designed to allow homeowners to rent their homes during periods of absence, such as having to move for work or other reasons
- It essentially allows properties to be rented for up to six years before being subject to capital gains tax, although the six-year period can be reset indefinitely
To paraphrase the late Kerry Packer, anyone who doesn’t try to minimise their tax bill should have their heads examined. Capital gains tax, or CGT, takes a particularly hefty slice of any profit you make from selling an investment property.
Depending on your tax bracket and how long you’ve owned the property for, it could cost you as much as 45% of the profits. In dollar terms, it means if you make $200,000 when you sell, you’ll be handing $90,000 of it straight to the taxman.
But what if you could avoid such a cost? This is where the six-year CGT rule may come in handy although it’s not always a ‘get out of jail free’ card.
What is the six-year CGT rule?
Also called the ‘temporary absence rule’, this concession essentially means you are able to rent out your principal place of residence (PPOR) for up to six years without paying any CGT as you would on the sale of a standard investment property producing rental income.
What you make in rent will still be treated as taxable income by the Tax Office, but you won’t have to pay CGT when you eventually sell the property (unless you rent it out for more than six years - more on that below).
The rule can also apply indefinitely if the property is not used to produce income, for example, if it remains empty or you only use it as a personal holiday home.
What's the catch?
To claim the six-year rule tax concession, you cannot treat any other property as your main residence, except for up to six months if you are moving house.
This basically means when you move out of your home, you’d need to rent another place or have generous friends or family who’d let you move in with them.
What the expert says
"A homeowner may get a job abroad or interstate for a period of time and may choose to rent out their property whilst they are away, fully intending to move back in when their contract ends.
"It simply wouldn't be fair not to apply the main residence exemption in these circumstances.
"To satisfy the six-year rule, the residence must have genuinely been your principal place of residence, or PPOR, to be exempt from capital gains tax.
"You must have also stopped living there, referred to as the temporary absence rule, so if you remain in the house but rent out part of it - say on Airbnb - the absence rule doesn't apply because you're still living there.
"Attempts to 'game the system' are a surefire way of attracting the attention of the Australian Tax Office."
What is a PPOR?
As our expert attests, to satisfy the Australian Tax Office under the six-year rule, the residence must have genuinely been a principal place of residence, or PPOR, to be exempt from CGT.
That means the dwelling must have been your main residence first and to qualify for the CGT exemption, you must have actually stopped living there, referred to as the temporary absence rule.
Savings.com.au’s two cents
The six-year rule is a fair concession made by the ATO for homeowners who have to leave their properties for any reason and choose to rent them out while they aren’t living there. It's worth noting the rule only applies to one property, your principal place of residence, regardless of how many other properties you might own.
If you’re unsure of how a CGT exemption may apply to your own situation, it’s best to consult an accountant or tax advisor to ensure you meet the criteria and determine the most tax-effective option for your circumstances.
It’s wise to do this before you attempt to take advantage of any rental income or tax exemption schemes of your own design. There will likely be some paperwork and detailed records you'll need to keep so it's good to know what boxes you'll need to tick beforehand.
Other conditions
As with most matters concerning the Tax Office, there are some caveats to the six-year rule.
Small businesses and homes used for income before moving out
If you operated a small business out of your home, such as a being a masseuse, consultant, or any other home-based profession, any part of the home used for your work will be subject to CGT.
For example, if you estimate 25% of the dwelling was used for your business, 25% of the total capital gain will be subject to CGT when you sell the home, while 75% will not under the six-year rule.
Show me the money
In dollar terms, that means if you make a $100,000 capital gain after two years of owning your home, $25,000 of that will be subject to CGT, although there’ll be a 50% discount for holding the asset for longer than a year.
So, if your top marginal income bracket is 45%, 22.5% of $25,000 equals $5,625 payable in capital gains tax.
What happens if you move more than once?
For a new six-year period to trigger, the homeowner must move back into the property and treat it as their main residence before it produces income once again.
To quote the ATO: “If you are absent more than once during the period you own the property, the six-year period applies separately to each period of absence.”
Resetting the six-year period
"If you rent the property out for, say, five years, then move back in for six months, then rent out the property again for another five years, your entire capital gain will be tax-free.
"The 'six-year rule' resets each time you move back into the property and live in it as your main residence.
"That means that if you move back in and then move out again, renting the property to tenants, you get a further six-year absence period during which the main residence exemption is protected."
What happens if the six-year limit is exceeded?
Any time your PPOR has produced income beyond the six-year threshold, it will be subject to CGT.
For example, if you sell the home after seven years, you’ll be subject to CGT based on that one extra year, provided you’ve labelled it as your PPOR for those initial six years.
It pays to work out a strategy around the six-year benchmark to save tax and maximise your return on selling your home. If in doubt, consult the ATO's advice on the six-year rule or seek the services of a tax specialist.
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| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
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6.49% p.a. | 6.53% p.a. | $3,157 | Principal & Interest | Variable | $0 | $530 | 90% |
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6.14% p.a. | 6.16% p.a. | $3,043 | Principal & Interest | Variable | $0 | $350 | 60% |
Case Study: Saving on CGT
Lou Pole buys his Brisbane home as a principal place of residence in 2020 for $700,000. In 2022, he needs to care for his sick mum in Perth. He moves in with her and while he’s there, he decides to rent out his Brisbane place but keeps treating it as his PPOR for tax purposes.
Three years later, in 2025, he decides to put the home on the market. He sells it for $900,000 - a $200,000 gain.
His top marginal income tax bracket is 30 cents in the dollar so without the six-year rule, he would have been up for $30,000 in capital gains tax. But thanks to the six-year rule, he isn’t taxed a cent on this profit.
Pros & Cons of the six-year CGT rule
Pros
- Save on tax : The most obvious benefit of the six-year rule is that you can avoid paying a considerable whack in tax, even after your home has essentially been a rental property while you haven't lived there.
- Generate income : The six-year rule allows you to earn extra income by renting out your home while maintaining your property's tax-free status.
- Flexibility : It allows property owners to hold onto their homes when they may need to move temporarily for work or other reasons without being penalised.
- Ability to reset the six-year period : The six-year rule has the added flexibility of being able to be reset indefinitely, allowing for longer-term absences as long as reset conditions are met.
- Great for rentvestors : It allows homeowners to rent their homes out to help pay their mortgages while they live elsewhere.
Cons
- You may need to pay to live elsewhere : An obvious drawback is that while you're not living in your own home, you're likely having to pay rent or your share of expenses to live somewhere else.
- Only applies to one residence : You can't buy another home and classify it as your PPOR while taking advantage of the six-year rule on another property.
- Meeting the rules: While the six-year rule is a boon if you genuinely have to move out of your home temporarily, if you move out specifically to take advantage of the CGT concession and pocket a bit of rent money, there are boxes you'll need to tick. These include meeting the standard requirements for renting out properties and then finding another place to live. It may not always put money in your pocket while you're doing it.
- Doesn’t apply to properties held by companies or trusts: The CGT exemption under the six-year rule only applies to properties in the names of individuals, not trusts or company structures.
- Open to Australian residents only: If you're are a non-resident of Australia for tax purposes and own a property in Australia, you are not entitled to claim the six-year CGT exemption when you sell it, even if it was your principal place of residence.