Capital Gains Tax and the 6-Year Absence Rule

What is Capital Gains Tax?

Capital Gains Tax (CGT) applies to the profit you make when you sell an asset, including an investment property, for more than what it cost you to acquire it. Your main residence (the home you actually live in) is generally exempt from CGT altogether. An investment property you’ve never lived in doesn’t get that exemption, and the gain is added to your taxable income in the year you sell.

A Note on Recent CGT Changes

Separate to the main residence exemption, the federal government passed reforms in 2026 that change how CGT is calculated on other capital gains from 1 July 2027 onward, replacing the 50% CGT discount with a system based on cost base indexation and a minimum tax rate. Importantly, this reform does not affect the main residence exemption or the 6 year absence rule, those continue to operate exactly as before. It’s only relevant if you’re eventually paying CGT on a gain that isn’t covered by the main residence exemption, for example, an investment property you’ve never lived in, or a rental property held beyond the 6 year window (see my post on Negative vs Positive Gearing for more on the broader 2026 reforms).

Capital Gains Tax Worked Example

Steven buys an investment property for $500,000 in 2023. By 1 July 2027 it’s worth $750,000. He sells in 2031 for $1,000,000, on top of his $80,000 salary that year.

His gain splits into two portions, taxed differently:
Pre-2027 gain (old 50% discount rule):
 $750,000 − $500,000 = $250,000
 $250,000 × 50% = $125,000 taxable
Post-2027 gain (new indexation rule):
 $1,000,000 − $750,000 = $250,000
 Cost base indexed for inflation to ~$840,000
 $1,000,000 − $840,000 = $160,000 taxable

Total taxable income for 2031:
 $80,000 + $125,000 + $160,000 = $365,000
Extra tax caused by the sale: ~$115,000

Steven keeps: ~$385,000 of his $500,000 gain

What is the 6-Year Absence Rule?

Here’s where it gets useful for a lot of people. If a property genuinely was your main residence at some point, and you then move out and rent it out, the ATO allows you to continue treating it as your main residence for CGT purposes for up to 6 years after you leave, even though you’re no longer living there and someone else is paying you rent.

This means if you sell within that 6 year window, you can still access the full main residence CGT exemption on the property, exactly as if you’d never moved out.

The Key Conditions

  • The property must have genuinely been your main residence first. You can’t buy a property, immediately rent it out, and later try to claim the 6 year rule, it needs to have actually been your home before you moved out.
  • You can’t claim the exemption on another property at the same time. If you buy a new home and treat that as your main residence while also claiming the 6 year rule on the old one, you’ll need to choose which one gets the exemption for any overlapping period.
  • If you move back in before the 6 years is up, the clock resets the next time you move out and rent it out again.
  • If you leave the property vacant (rather than renting it out), the main residence exemption can actually continue indefinitely, the 6 year cap specifically applies to periods where the property is earning rental income.

Case Example

Michael buys a home and lives in it for 4 years.
His job then relocates him interstate, so he moves out and rents the property to a tenant, while renting a place himself in his new city.
Three years later, his circumstances change and he sells the original property.
Because he sells within the 6 year window and hasn’t claimed the main residence exemption on any other property in the meantime, the sale remains fully CGT exempt, even though he hadn’t lived there for the last 3 years.

Why This Matters for Rentvesting and Relocation

This rule is particularly relevant if you’re relocating for work, travelling for an extended period, or considering a rentvesting style strategy where you rent out your existing home rather than sell it (see my post on Rentvesting). It gives you genuine flexibility to hold onto a property as a rental for a period without immediately triggering a CGT bill down the track, as long as you’re aware of the conditions and keep good records of when you moved in and out.

The Bottom Line

The 6 year absence rule is a genuinely useful piece of flexibility if your home becomes a rental for a period, whether that’s due to relocation, travel, or a deliberate strategy. Keep clear records of your move in and move out dates, don’t claim the exemption on two properties at once, and if your situation is anything but straightforward, it’s worth confirming your specific position with an accountant before you sell.

The Capital Gains Tax has changed massively since the 2026 Budget announcements. Expect to be able to calculate your pre-budget gain and post budget gain then calculate how much capital gain you need to add to your taxable incomes. Best to speak to an accountant about this.