The CGT 6-year rule, explained.

What the rule actually says.

Under s118-145, if you move out of your main residence and rent it out, you can elect to continue treating it as your main residence for CGT purposes for up to 6 years from the move-out date. The consequence: the rental period does not count as investment-use for the partial-exemption calculation, and the property remains fully exempt from CGT on sale.

If you move out and don’t rent it — leave it empty, use it occasionally — the exemption is indefinite, no 6-year cap.

The rule is an election, not automatic. You claim it on your tax return in the year of sale. The ATO doesn’t apply it for you.

Worked example — the classic case.

Without s118-145:The property is exempt for 2 years (PPOR) out of 8 years total. Taxable proportion is 6/8 = 75% of the gain, or $375,000. At 50% discount (s115-25) that’s $187,500. At 37% marginal rate: $69,375 CGT payable.

With s118-145 elected: All 8 years count as main residence (2 actual PPOR + 6 absence-rule years). Full exemption applies. $0 CGT payable.

Net saving from one election on a tax return: ~$69,000.

The critical constraint: one main residence at a time.

You can’t use s118-145 to cover a rented former home if you’re simultaneously claiming a differentproperty as your main residence. A couple filing separately may be able to split this — one partner claims the rented property under s118-145, the other claims the current home as PPOR — but it’s complex and the ATO scrutinises this pattern. Get advice before relying on it.

The common trap: moving out, renting the old home, buying and living in a new home, and then trying to claim both as main residence. You can’t. The new home becomes your main residence from the moment you move in, and s118-145 on the old home ends.

The 6-year clock and the re-set rule.

The 6-year count starts from the day you move out. If you move back in at any point before the 6 years elapse, the clock fully resets — you can then move out again and claim another 6 years under the rule.

There’s no limit on how many times you can reset. A property you live in for 1 year, rent for 5, live in for 1, rent for 5, live in for 1, sell — can be fully exempt across 13 years of ownership if you elect s118-145 for each absence.

The “moving back in” needs to be genuine — establishing residence, not a token stay. Bills in your name, furniture present, address updated on Electoral Roll and driver’s licence. The ATO applies a reasonableness test.

What happens if you rent beyond 6 years.

If the rental period exceeds 6 years, only the first 6 years are covered by the rule. Any rental period beyond year 6 counts as investment use in the partial-exemption calculation.

Example: lived 2 years, rented 8 years. Rule covers the first 6 rental years as PPOR-equivalent. Years 7 and 8 of rental are investment use. Exempt proportion: (2 + 6) / (2 + 8) = 80%. Taxable proportion: 20% of the gross gain.

On a $500K gain: $100K taxable, $50K after 50% discount, ~$18,500 CGT at 37% marginal. Still much better than full investor treatment, but the 2 extra rental years cost ~$18,500.

Establishing PPOR before moving out.

The 6-year rule only applies to a property that was genuinely your main residence at some point. You have to have lived in it before renting it out for the rule to apply. A property purchased and immediately rented — never lived in — can never qualify under s118-145.

What counts as “establishing residence”: moving in with your household goods, updating mail/bills/Electoral Roll, staying a genuine period of time (usually at least 3 months is a practical floor, though no specific minimum exists in the Act).

Interaction with depreciation deductions.

While the property is rented under the 6-year rule, you can still claim all the normal investment-property deductions: interest, rates, insurance, Div 40, Div 43. The rule is about CGT status at sale, not about deductibility during rental.

The trade-off: claiming Div 43 during rental reduces your cost base at sale under s110-45(2) — but since you’re using s118-145 to keep 100% PPOR exemption, the recapture has no effect. You get the deductions during rental and the full main residence exemption on sale. This is genuinely compounding.

When s118-145 doesn’t help.

• You never lived in the property (it was always an investment).
• You’re claiming a different property as your main residence during the rental period (unless you split with a spouse, which is complex).
• You rented for more than 6 years without a genuine re-set.
• You’re a foreign resident at time of sale (since 2019, foreign residents can’t access main residence exemption at all).

The short version.

s118-145 lets you treat a rented former main residence as your PPOR for up to 6 years for CGT purposes. Elect it on the tax return in the year of sale. Can be reset by genuinely moving back in. Doesn’t help if you’re claiming another property as PPOR simultaneously. Stacks cleanly with Div 40 / Div 43 deductions during the rental period.

For the full CGT-at-sale read, see our capital gains tax when selling property guide.