A nurse from Nowra took a two year contract in London a while back, largely for the career experience. She rented out her house while she was away, since leaving it empty made no sense. Before she left, she asked her agent a question. Would that rental income wreck the tax free status of her home when she eventually sold it. It would not, at least not straight away, thanks to something called the capital gains tax 6 year rule.
Here is the short version. If you move out of your main residence and rent it out, you can generally still treat it as exempt from capital gains tax for up to six years. This applies as long as you do not treat another property as your main residence during that time.
Either way, getting the timing right matters, since selling just outside the window can change the outcome. A tax agent can check exactly where you stand before you decide when to sell.
What is the capital gains tax 6 year rule
Normally, your main residence stays exempt from capital gains tax only while you actually live in it. The six year rule extends that exemption after you move out. This only applies if you rent the property out for income. Without this rule, moving out and renting the place would usually start the clock on a taxable gain straight away.
Why the rule exists
In reality, people move for all sorts of reasons. In fact, work postings, family circumstances, and overseas contracts all come up regularly. Rather than forcing someone to sell a home just to avoid a tax problem, the rule gives them a genuine window. They can rent it out, sort out their circumstances, and decide what to do next.
How the rule fits into a bigger financial decision
Renting out a former home instead of selling it is often a genuine financial choice, not just a tax one. For instance, mortgage repayments, rental demand in the area, and how quickly someone might need to sell all factor into the decision. The six year rule simply removes tax timing as one more thing to worry about, at least for a while, so people can focus on the practical side of the decision instead.
How long the exemption lasts if you do not rent it out
This is where people often get confused. Say you move out and simply leave the property vacant, rather than renting it out. In that case, the exemption can actually continue indefinitely, not just for six years. The six year cap only kicks in once the property starts earning rental income. An empty home you are not renting gets treated differently to one earning cash flow.
Why an empty property gets different treatment
The logic here comes down to income. In practice, a property earning rent looks more like an investment, even if it used to be your home. On the other hand, a vacant property still looks and functions like your former home, just temporarily unoccupied. That distinction is exactly why the rules treat the two situations so differently.
What resets or breaks the six year rule
Moving back into the property resets the clock. If you later move out and rent it again, a fresh six year window generally starts from that point. On the other hand, treating a different property as your main residence during this period usually ends the exemption on the original home. You cannot claim two main residences for the same period.
Can you use the rule more than once
Yes, in principle. Each time you move out, rent the property, then move back in before moving out again, a new six year window can apply. Otherwise, this suits people who move for temporary work stints and return to the same home repeatedly. Even so, keeping clear records of each period matters more the more times this happens. Working out several overlapping periods later is far harder than tracking them as they occur.
What happens if you sell after the six years
Selling after the six year mark does not create an automatic tax disaster. Instead, it does mean the home is no longer fully covered by this particular exemption. From that point, the property gets treated more like a standard investment for the portion of time beyond six years. A tax agent can work out the taxable proportion, based on how long the property was rented beyond the exempt window.
A teacher from Nowra who took back to back postings interstate ended up renting her house out for almost eight years in total. Even so, she was not in trouble for going over six years. Instead, her agent simply calculated the small taxable portion tied to those extra two years. It was far less costly than she had feared.
Working out the taxable portion
The calculation generally compares the total time you owned the property against the time it was rented beyond six years. Only that proportion of the eventual gain becomes taxable, not the whole amount. This is why going slightly over the six year mark rarely creates the disaster people worry about, even though it does change the numbers.
What if you only rent out part of the property
First, renting out a single room while still living in the rest of the home works differently to renting the whole property out after moving away. In fact, partial rental while you still live there generally does not trigger the six year rule at all, since you have not actually moved out. The rule specifically concerns what happens once you leave the property entirely and it becomes fully tenanted.
How this fits with your main residence exemption
The six year rule is really just an extension of the ordinary main residence exemption, not a separate scheme on its own. For a broader look at how the exemption and the rest of capital gains tax works, our capital gains tax guide covers the basics that sit underneath this rule.
If you are weighing up whether to rent out a home you are moving away from, working through the numbers with a tax agent before you decide helps you plan the timing properly. When you are ready to talk through your situation, get in touch and we will walk you through it. The ATO website also has detailed guidance on the absence rule specifically.
Frequently asked questions
Does the six year rule apply if I do not rent my home out
Not in the same way. If the property sits vacant rather than earning rent, the exemption can continue indefinitely, rather than being capped at six years. The six year limit specifically applies once the property is being rented out.
What happens if I move back into my home
Moving back in resets the clock. If you move out and rent the property again later, a fresh six year window generally applies from that new departure date.
Can I use the six year rule twice
Yes, potentially more than twice. Each cycle of moving out, renting, and moving back in can start a new six year window. Good record keeping becomes essential the more times this happens.
Do I need to tell the ATO I am using the six year rule
There is no separate registration for it. You simply apply the rule when working out your capital gains tax position at the time you eventually sell. This relies on your own records of when you moved out and when the property was rented.
What if I sell after more than six years
The exemption no longer covers the full period. Instead, a portion of any gain becomes taxable, based on how long the property was rented beyond the six year mark, rather than the whole gain becoming taxable at once.
Does it matter why I moved out originally
Generally not. The rule does not require a specific reason for moving out, whether that is work, family, or simply choosing to live elsewhere for a while. What matters is whether the property was rented and how long that rental period lasted.
Does the six year rule apply to more than one property at a time
No. You can only have one main residence for tax purposes at any given time. If you own more than one former home that could qualify, you generally need to choose which one the exemption applies to for any overlapping period. Getting this choice right matters, since it affects the outcome for both properties down the track.
What records should I keep while using the six year rule
Keep the date you moved out, your lease agreements, and any dates you moved back in if that happened. Since a sale might not occur until years later, having these details written down early saves a lot of guesswork when it finally comes time to calculate the numbers. A simple note in a shared family file is often enough, as long as someone keeps it updated.