What Is the 6-Year Rule for Investment Property in Australia?

In Australia, investment properties are usually subject to CGT (Capital Gain Tax) as per Australian tax laws. Capital Gains Tax only applies when the property is used to generate rental income. Owners pay Capital Gains Tax as part of annual income tax for the financial year that the rental property is sold.

However, the Australian Taxation Office (ATO) has a special rule that applies to rental properties that have previously been used as the owner's main residence. This 6-year rule offers investors a way to enjoy tax savings when converting their home into an investment property.

How Does the 6-Year Rule Work?

The 6-year rule allows eligible properties that have formerly been used as a main residence to continue being treated as such for tax purposes. If you move out of a home and have used it to generate income, you can claim CGT exemption for up to 6 years.

For example, a home used as a rental property for 20 years will only be subject to CGT for 14 years of rental activity.

The 6 years can also be broken up across multiple periods of absence. You can use a former home to generate rental income for 2 years, decide to move back in for 5 years, then convert it back to a rental property for another 4 years after - the property will still be exempt from CGT for the total 6 years it was used to generate rental income.  

The most important aspect of the 6-year rule is that it can be ‘reset’ after each period of absence (when you move out), provided you move back into the home and use it as a main residence between absences.

If you live in a home for 2 years, then move out and rent it for 4 years, CGT exemption will apply for the 4 years of rental activity. When you move back into the home, a fresh 6-year period will apply if you choose to rent it out again in future.

Eligibility for the 6-Year Rule

For a property to be eligible for the 6-year CGT exemption rule, it must first have been used as the owner’s main residence.

There is no minimum period for a property to be considered a main residence - the ATO looks at the nature of the stay within the home rather than specific time periods. In general, the owner must have genuinely lived in the property as their home. 

Instead, the ATO looks at several indicators to decide if a property can be considered your main residence for tax purposes. 

• Whether you occupy the property or reside with family members
• Have personal property like furniture in the property
• Registered the property with the AEC, and as your postal address
• Demonstrate intent to reside there permanently

You must also have moved out of the property for the 6-year rule to apply. 

Does the 6-Year Rule Apply to New Builds?

Yes, the 6-year rule will apply to a new home build, as long as it has been used as a main residence before being used to generate rental income.

The only time you can claim two properties as a main residence is for a maximum of 6 months when you are moving from one to another (selling the old and buying the new). Beyond that 6-month window, you have to choose which one gets the exemption. 

Builder Direct offers new home builds for investment in Townsville, Mackay, and Cairns. If you are looking to build a new home for use as a rental property down the line, we can help.