Turning Your Home Into a Rental: Six-Year Rule and New CGT

If you move out of your home and rent it, you can usually keep treating it as your main residence for capital gains tax (CGT) for up to six years, provided you don’t elect another property as your main residence at the same time. Under the 2026–27 reforms, that basic six‑year rule still exists, but CGT outside the exemption becomes harsher, so mistakes cost more and record‑keeping matters.

The six-year rule lets many accidental landlords keep main residence CGT protection for a limited time.

Quick refresher: main residence exemption and six-year rule

Your main residence exemption normally means no CGT when you sell the home you genuinely live in.

The six-year rule (s118‑145 ITAA 1997) lets you:

1. Move out of your home.
2. Rent it out.
3. Still treat it as your main residence for CGT for up to six years while it’s producing income.

Key conditions in plain English:

• The property must have genuinely been your main residence first (you actually lived there).
• You can’t treat another property as your main residence for the same period (with narrow overlap exceptions when moving).
• If you move back in, the six-year clock can reset if you later move out again.

For a fuller walkthrough of how the exemption interacts with loans and gearing, see Capital gains tax, your home and geared property under new rules.

Simple worked example

• Buy and move into an apartment: July 2022.
• Move out and rent it: July 2024.
• Keep renting it until you sell: June 2030.

You choose to keep treating it as your main residence from July 2024 to June 2030 (6 years).

Result under current rules:

• Entire ownership period (2022–2030) is covered by the exemption.
• No CGT, even though it’s been a rental for years.

What changes under the 2026–27 CGT reforms?

From 1 July 2027, the Budget and reform bill proposals mean:

• The main residence exemption stays (this is critical for accidental landlords).
• For taxable gains (where the exemption doesn’t fully apply), the old flat 50% CGT discount for individuals and most trusts is replaced with:
  • CPI indexation of cost base, and
  • A 30% minimum tax on many capital gains.

So:

• If your main residence exemption fully covers the gain, nothing changes.
• If you only get a partial exemption (e.g. you exceed six years or elect another home), the taxable slice is likely higher than today.

That’s why using the six‑year rule cleanly is now more valuable for geared investors and accidental landlords than it used to be.

Accidental landlords: the real-world traps

Many people fall into this when they:

• Take a job interstate or overseas.
• Move in with a partner and rent out their old place.
• Keep their unit as a “backup” while upgrading.

Here’s where things go wrong.

1. Forgetting the six-year cut-off

If you rent your former home for more than six years in a row without moving back in, you start to lose the exemption on a time-apportioned basis.

Example:

• Own for 12 years in total.
• First 2 years: live in it.
• Next 8 years: rented (you keep claiming main residence for the first 6 of those 8).
• Last 2 years: still rented (no main residence choice left).

Result:

• 10 years exempt (2 + 6 + often the final period concession, subject to detailed rules).
• About 2 years taxable (those excess rental years), taxed under the tougher post‑2027 CGT settings if the sale is after that date.

2. Electing the “wrong” main residence

You generally can’t have two full main residences for CGT at once.

When you upgrade, you’ll often choose between:

• Keeping the old place as your main residence (under the six‑year rule), or
• Starting the main residence clock on the new home immediately.

For many, keeping the older, more heavily geared property as the main residence for longer is smarter, particularly where CGT on the new home is unlikely to matter (e.g. you’ll own it for decades and maybe never rent it out).

This choice is now higher‑stakes because CGT on the “non‑chosen” property will be calculated under the new indexation + minimum tax regime.

Loans, offsets and tax tracing once you move out

Once your home becomes a rental, the ATO cares about what the original borrowings were used for, not what the property is doing today.

That means:

• Interest on the portion of the loan used to buy/renovate the property is typically deductible while it’s rented.
• Interest on money redrawn for personal use (cars, holidays, school fees) is not deductible, even if the property is now an investment.

A practical structure when you might become an accidental landlord:

• Use an offset account, not redraw, for surplus cash while you live there.
• If you later move out and rent it, you can simply move savings elsewhere and let the original loan interest become deductible without messy mixed‑purpose debt.

This is exactly why recent guidance emphasises offsets over redraw when a property’s use could change.

For broader strategy on separating home and investment risk, see Property strategy for self‑employed and high‑income investors after tax shifts.

One-week action checklist for accidental landlords

If you currently rent out your former home, or plan to soon, use this week to:

1. Map your dates

   • Move‑in, move‑out, first rental date, any periods you moved back in.
   • Put it in a simple timeline.

2. Check the six-year window

   • Count continuous rental years.
   • If you’re approaching year five or six, get tax advice before signing a new fixed‑term lease.

3. Decide which home is your main residence

   • Old property under six‑year rule vs current home.
   • Model tax on each under the new CGT regime.

4. Sort your loan structure

   • Identify any mixed‑purpose debt.
   • Consider splitting loans and using offsets so deductible and non‑deductible portions are cleanly separated.

5. Order valuations when things change

   • Get an independent valuation when you first rent the property and if you stop claiming the main residence exemption.
   • That will help calculate any partial taxable gain under the new rules.

6. Stress‑test keeping vs selling

   • Check cashflow without relying on generous negative gearing (especially after 1 July 2027).
   • Compare against selling and redeploying equity into your next move – see Step‑By‑Step: Using Home Equity To Buy Your Next Investment.

FAQs

If I live overseas and rent my home, do I still get the six-year rule?

Generally yes, if the property was your main residence before you left and you don’t elect another main residence in Australia. However, non‑resident CGT rules can change the tax rate and how the exemption applies. If you’re already a non‑resident, or will be when you sell, you need specific advice because recent reforms have targeted non‑resident property owners.

What if I move back in after renting for a few years?

If you move back into the property and genuinely live there again, the six‑year rule clock can reset. Future absences can then qualify for another period of up to six years. You still need to watch total rental periods and keep good records of when you lived there vs when it was rented.

Do I need to tell the ATO when I choose my main residence?

There is no separate form to elect your main residence in advance. The choice is effectively made in your tax return for the year you sell, based on how you disclose the gain. That’s why clear timelines, valuations and documentation are so important – they support the position you take when you eventually sell.

Key takeaways

• The six‑year rule and main residence exemption survive the 2026–27 reforms, but mistakes are punished more harshly.
• Accidental landlords must track dates, leases and loan purposes so partial CGT can be calculated cleanly under the new rules.
• Choosing which property is your main residence when you move is now a major tax decision, not an afterthought.

Want a second pair of eyes on both your tax and loan structure? Book a free 15‑minute strategy call at localknowledgefinance.com.au/booking – your tax, your loan, one expert (CPA + Tax Agent + Broker in one consultation).

General advice only.