The 6-year rule (or main residence exemption) allows homeowners in Australia to treat their former home as their principal place of residence for Capital Gains Tax (CGT) purposes for up to 6 years after moving out, even if they rent it out. This means the property remains exempt from CGT during this period.
The main residence exemption 6-year rule in Australia allows you to treat a former home as your main residence for up to 6 years after you stop living in it and start generating income (like renting it out), potentially avoiding Capital Gains Tax (CGT) when you sell. This rule offers flexibility, as the 6-year limit only applies to income-producing periods, and the "clock" resets if you move back in, allowing for multiple periods of exemption.
As of January 1, 2023, there are new rules if you own a housing unit (including a rental property) for fewer than 365 consecutive days. In most cases, any rise in value will not qualify for the capital gains exemption and, moreover, will be taxable as business income rather than a capital gain.
Want to lower the tax bill on the sale of your home? There are ways to reduce what you owe or avoid taxes on the sale of your property. If you own and have lived in your home for two of the last five years, you can exclude up to $250,000 ($500,000 for married people filing jointly) of the gain from taxes.
The main residence exemption is one of the most powerful tools available to Australian property owners. It allows you to avoid capital gains tax on the sale of a property if it has been your principal place of residence (PPOR) for the entire ownership period. To qualify, the property must have been your genuine home.
On a $100,000 capital gain, you'll likely pay 15% for long-term gains, resulting in about $15,000 in federal tax (plus potential state tax), but it could be 0% or 20% depending on your total taxable income and filing status, while short-term gains are taxed as ordinary income (potentially 22-24%).
Live in the house for at least 2 years
One of the most effective ways to avoid capital gains taxes is by meeting the ownership and use test. If you live in your home for at least 2 out of the 5 years before selling, you may qualify for the Section 121 exclusion.
To prove the IRS's 2-out-of-5-year rule, you must show you owned and lived in your home as your primary residence for at least 24 months (two years) (not necessarily consecutive) within the five years before the sale, using documentation like utility bills, driver's license, voter registration, tax returns, bank statements, and mail all showing the home address. This proves you meet both the ownership and use tests for excluding capital gains on the sale, requiring documentation to back up your claim of residency during that period.
Turn your primary residence into a rental property to defer capital gains tax. The property must be rented at fair market value for a period of time. Consult a tax attorney, tax accountant, or financial services advisor about this strategy to comply with IRS rules.
Outside of your tax circumstances, having two primary residences is possible on the lender side. For example, a married couple could acquire two primary residences if each spouse buys a primary residence and keeps their mortgages separate. This would mean each spouse having sufficient income on their own to buy a home.
When you sell your home or when you are considered to have sold it, usually you do not have to pay tax on any gain from the sale because of the principal residence exemption. This is the case if the property was solely your principal residence for every year you owned it.
How can I reduce capital gains taxes?
You cannot nominate another property as your main residence during the period you're applying this rule. If you move back into the property and live in it again, the six-year clock resets.
To qualify for 0% capital gains tax, you must have long-term capital gains (assets held over a year) and your taxable income (after deductions) must fall below specific IRS thresholds, which change annually but are roughly <$48,350 for single filers and <$96,700 for married filing jointly for the 2025 tax year, allowing for higher total income when combined with deductions like the standard deduction. The key is keeping your adjusted gross income (AGI) low enough so that after subtracting deductions, your taxable income remains within these limits.
If you didn't sell another home during the 2-year period before the date of sale (or, if you did sell another home during this period, but didn't take an exclusion of the gain earned from it), you meet the look-back requirement. You may take the exclusion only once during a 2-year period.
Capital improvements: Improvements that add value to your home or prolong its useful life can reduce the amount of capital gains tax you owe when you sell your home, but won't be immediately deductible.
You might be able to defer capital gains by buying another home. As long as you sell your first investment property and apply your profits to the purchase of a new investment property within 180 days, you can defer taxes.
To qualify for the capital gains tax exemption on a home sale, you generally must have owned and lived in the home as your primary residence for at least two of the past five years—and not used the exemption on another home in the last two years.
The primary purpose of the 75% Rule is to ensure that the Replacement Property aligns closely with what was initially identified. This alignment is crucial for maintaining compliance with the IRS regulations and securing the tax-deferral benefits of a 1031 exchange.
If you sell your house and don't buy another, you'll have cash proceeds (after paying off the mortgage and selling costs) and need to decide on new housing, often renting or moving in with family; financially, you might benefit from the IRS capital gains exclusion (up to $250k/$500k profit if you've lived there two of the last five years), but you'll pay tax on gains beyond that, while also managing the new costs of renting or storage.
One of the simplest yet most expensive mistakes is misunderstanding the difference between short-term and long-term capital gains taxes. Short-term gains — profits from assets held less than a year — are subject to typical income tax rates, which can reach 37% for high earners.
Key Takeaways
The over-55 home sale exemption allowed homeowners over 55 to exclude up to $125,000 of capital gains from their taxes when selling a primary residence; however, this exemption ended in 1997.