Most people know, in a general sense, that selling the family home doesn't trigger capital gains tax. That's true — but the exemption isn't automatic in every situation, and a surprising number of Melbourne property owners find that out for the first time when they're already sitting down with their accountant after settlement, rather than before.
If you've ever rented your home out, worked from it, moved out for a while, or bought it with renovation plans, the exemption can end up being partial rather than complete. Here's how it actually works, and where the common trip-ups are.
When You Get the Full Exemption
Your home is fully exempt from CGT when you sell it, provided:
- It's been the home of you (and your partner and dependants) for your entire period of ownership
- You haven't used it to produce income — no renting it out, no running a business from it, and no buying it purely to renovate and sell at a profit
Meet both conditions, and you disregard any capital gain (or loss) entirely when you sell. No further calculation needed.
When You Only Get a Partial Exemption
If your home was used to produce income for part of the time you owned it — most commonly because you rented it out at some point, or ran a business from a dedicated part of it — you're generally only exempt for the portion of ownership it was genuinely your home.
The taxable portion of your capital gain is broadly worked out as:
Capital gain × (days not your main residence ÷ total days owned)
If you've owned the property for more than 12 months, you can generally then apply the 50% CGT discount to that taxable portion.
A Simplified Example
Say you bought a townhouse and lived in it for 6 years, then rented it out for 2 years before selling. Out of a total ownership period of 8 years (2,920 days), 730 days were not your main residence. If your total capital gain on sale was $300,000:
$300,000 × (730 ÷ 2,920) = $75,000 taxable
$75,000 × 50% discount = $37,500 included in your tax return
The remaining $225,000 of the gain stays exempt. The exact figures depend on your dates and numbers, but the shape of the calculation is the same in most straightforward cases.
The 6-Year Rule
Here's where a lot of owners save themselves a considerable amount of tax, often without realising it applies to them. If you move out of your home and rent it out, you can still choose to treat it as your main residence — and keep the full exemption — for up to 6 years, provided you don't treat any other property as your main residence in the meantime.
A few points worth knowing:
- If you don't rent the property out after moving out (for example, you leave it vacant or use it as a holiday house), the exemption can continue indefinitely — the 6-year cap only applies to periods it's earning rental income.
- If you move back in before the 6 years is up, then move out again later, the 6-year clock resets for that new period of absence.
- You can only treat one property as your main residence at a time (aside from a short overlap of up to 6 months when moving house).
- If you rent the property out for longer than 6 years in one continuous absence, only the period beyond 6 years becomes taxable — not the whole rental period.
Renting a Room or Running a Business From Home
If you rent out part of your home, or run a business from a dedicated space in it, while still living there, a different partial exemption applies — based on the floor area used to produce income, alongside how long that use continued.
A few things that matter here:
- Occasionally working from home, or working from your laptop at the kitchen table, doesn't affect your exemption at all.
- It only becomes relevant if the space is your principal place of business, is genuinely set aside for that purpose, and you're claiming (or could claim) a tax deduction for loan interest against that portion of the property.
- If someone else uses part of your home to produce income — for example, an adult child running a small business from a spare room — and you don't receive any payment for it, your full exemption isn't affected.
What to Do Before You Sell
The exemption calculations above all depend on accurate records, and the biggest cost we see isn't the tax itself — it's not having the information needed to calculate it properly. Before selling a property with any rental, business, or mixed-use history:
- Keep a clear record of dates — when you moved in, when you moved out, and the exact period(s) it was rented or used for business.
- Get a market valuation at the point the property first earned income, if it was previously fully exempt. This value can become the effective starting point for calculating your capital gain, and is far easier to get accurately at the time than to reconstruct years later.
- Talk to us before you sign a contract to sell, not after — particularly if the 6-year rule, an overlapping move between two homes, or a change of use might apply to your situation.
How Phan Campbell & Associates Can Help
At Phan Campbell & Associates in Footscray, our tax and accounting team regularly works through main residence exemption questions for Melbourne property owners — whether that's a straightforward sale, a property with rental history, or a more complex situation involving multiple periods of absence. If you're planning to sell a property that hasn't been your home the whole way through, get in touch before settlement so we can help you get the calculation right.
Frequently Asked Questions
1. Do I pay capital gains tax when I sell my home?
Generally no, if it's been your home for your entire period of ownership and you haven't used it to produce income — for example, by renting it out, running a business from it, or buying it to renovate and sell for a profit. If any of those apply for part of your ownership, you may only get a partial exemption for the years you didn't live there.
2. What is the 6-year rule?
If you move out of your home and rent it out, you can still treat it as your main residence — and keep the full CGT exemption — for up to 6 years, as long as you don't treat any other property as your main residence during that time. If you don't rent it out, the exemption can continue indefinitely.
3. Does working from home affect my main residence exemption?
Occasionally working from home doesn't affect your exemption. It only becomes relevant if the space is your principal place of business, is set aside specifically for that purpose, and you're claiming a tax deduction for loan interest against that portion of the property.
4. What records should I keep if I've rented out my home or worked from it?
Keep the dates you moved in and out, the dates and duration of any rental or business use, and a record of the property's market value at the time it was first used to produce income, since this can affect how your capital gain is calculated when you eventually sell.