For most Australians, the family home is the largest asset they will ever own — and the main residence exemption is the largest tax concession they will ever use, usually without realising it. When the exemption applies in full, the entire capital gain on your home is tax-free. But the exemption is not automatic and it is not unconditional. Home offices erode it. Land over two hectares falls outside it. Periods of absence, building works, inheritance and foreign residency all change the answer. Many homeowners only discover the conditions at the worst possible moment: after the contract is signed.

This guide from Trinity Accounting Practice walks through the whole exemption: what qualifies as a main residence, how full and partial exemptions are calculated, the 6-year absence rule in summary, and the special rules for building, business use, deceased estates and foreign residents — with a worked partial-exemption example.

What counts as your main residence

There is no minimum time you must live in a dwelling, and no single decisive test. The ATO weighs the facts together: whether you and your family live there, where your personal belongings are, your mail and electoral roll address, utility connections, and your intention in occupying the place. A house, unit, townhouse — even a caravan or houseboat you live in — can qualify. A property you bought and never moved into cannot, no matter what your intentions were. The ATO’s eligibility guidance sets out the factors.

Two boundary rules matter more than people expect:

The 2-hectare limit. The exemption covers the dwelling and up to 2 hectares of adjacent land used primarily for private purposes. Own a 5-hectare lifestyle block near Camden and only the dwelling plus your chosen 2 hectares can be exempt — the remaining 3 hectares are subject to CGT on sale. You can generally choose which 2 hectares, so choosing the most valuable land matters.
One main residence at a time. A couple can only have one main residence between them (or split the exemption across two). When you are moving between homes, both can be treated as your main residence for an overlap of up to 6 months, provided conditions are met — the old home was your main residence for a continuous 3 months in the 12 months before sale and was not income-producing in that 12 months.

Full exemption vs partial exemption — the days formula

If the dwelling was your main residence for your entire ownership period, was never used to produce income, and sits on 2 hectares or less, the gain is generally fully exempt — you do not even report it. Anything short of that produces a partial exemption, calculated on a days basis:

Taxable gain = total capital gain × (non-main-residence days ÷ total ownership days)

Non-main-residence days are broadly the days the dwelling was not your main residence (and not covered by an absence choice). The 50% CGT discount then generally applies to the taxable portion if you have owned the property for more than 12 months. Where the property first earned income after you lived in it, a market-value cost base reset may apply instead — a key interaction covered in our 6-year rule explainer.

The 6-year absence rule — in brief

Once a property has genuinely been your main residence, you can choose to keep treating it as your main residence after moving out: indefinitely if it stays vacant, or for up to 6 years per absence if you rent it out — with the clock resetting if you genuinely move back in. The trade-off is that no other property can be your main residence for the same period. The mechanics — the clock, the reset, the home-first requirement, the market value reset and the foreign resident trap — deserve their own article, and we have written it: see Trinity’s CGT 6-year rule explainer for the full timelines and a worked example.

Using your home to make money erodes the exemption

The exemption assumes your home is a home. Use part of it to produce income and that part falls outside the exemption for that period:

Running a business from home — a hairdressing studio in the garage, a consulting room, a workshop. If that part of the home would have entitled you to claim occupancy costs (such as mortgage interest) as a deduction, the corresponding share of the eventual gain is taxable, based on floor area and the period of use.
Renting out a room or a granny flat — same principle: the income-producing share, for the income-producing period, is taxable.
A home office for an employee working from home — generally does not erode the exemption, provided you are only claiming running costs (electricity, internet) and not occupancy costs. This distinction confuses many remote workers; claiming the wrong category can convert a tax-free home into a partially taxable one.

Building, knock-down-rebuilds and the 4-year rule

Buying land to build, or knocking down and rebuilding, creates a gap when no dwelling exists to live in. Section 118-150 lets you treat the land as your main residence for up to 4 years before the new dwelling becomes your home — provided you move in as soon as practicable after completion and live there for at least 3 months. Miss those conditions and the construction period becomes non-main-residence days in the partial exemption formula.

Deceased estates — the 2-year window

Inherit a home and the exemption can follow it. If the property was the deceased’s main residence (and not income-producing) just before death, or was acquired by the deceased before 20 September 1985, a sale that settles within 2 years of the date of death is generally fully exempt — regardless of what the beneficiaries do with it in the meantime. The ATO can extend the 2 years in limited circumstances (such as a contested will or delays outside the executor’s control), and the exemption can also continue beyond 2 years where an eligible person (such as the surviving spouse) keeps living in the home. We cover the inheritance side in detail in our guide to tax on inheritance in Australia.

Foreign residents — generally excluded

Since 30 June 2020, a person who is a foreign resident for tax purposes at the time of sale generally cannot claim the main residence exemption at all — for the entire ownership period, not just the overseas years — unless they satisfy a limited life events test within six years of becoming a foreign resident. For Australians planning a stint overseas, the timing of any sale relative to tax residency may be the single biggest tax decision they make.

Worked example — a partial exemption with a home business

David and Lena buy a house in Penshurst in March 2014 for $900,000 and live in it throughout. From March 2018, Lena runs her physiotherapy practice from a converted double garage and front room — 20% of the floor area — and claims a share of mortgage interest and occupancy costs. She closes the home practice in March 2024. They sell in March 2026 for $1,900,000 — a $1,000,000 gain (ignoring costs for simplicity).

Total ownership: 12 years. Business use: 20% of the home for 6 years.
Taxable portion ≈ $1,000,000 × 20% × (6 ÷ 12) = $100,000.
50% CGT discount (held over 12 months): taxable gain = $50,000, split between them — $25,000 each added to assessable income.
At a 39% marginal rate including Medicare levy, tax of roughly $9,750 each — about $19,500 in total on a $1,000,000 gain.

The remaining $900,000 of gain stays tax-free under the exemption. Note also: the small business CGT concessions can sometimes reduce the business-use portion further — one of several reasons the calculation is worth professional eyes.

A Trinity insight from 22 years in practice

The main residence exemption is the concession people are most confident about and least correct about. In 22 years, the most common surprises we have seen at Trinity are not exotic: a deduction claimed for mortgage interest on a home office that quietly converted part of the home to taxable; a lifestyle block over 2 hectares; a deceased estate sold 26 months after death instead of 23. None of these are catastrophic if identified early — all of them are expensive when discovered at sale. Our habit is to ask every homeowner client one question annually: “has anything changed about how you use your home?” That question has paid for itself hundreds of times over.

What this means for you

If you claim home office occupancy costs (mortgage interest, rates): part of your home may now be exposed to CGT — check before you claim, not after.
If you run any business from home: record the floor area and the start and end dates; the eventual calculation depends on them.
If your property is over 2 hectares: plan which land the exemption will cover, and get the valuation evidence to support it.
If you are buying before selling: the 6-month overlap rule has conditions — confirm you meet them before relying on it.
If you have inherited a home: the 2-year disposal window is the difference between tax-free and taxable — diarise it from the date of death.
If you are knocking down and rebuilding: the 4-year rule has a move-in-promptly condition — factor it into the build timeline.
If you may be a foreign resident when you sell: seek advice first; the whole exemption may be at stake.

How Trinity can help

Trinity Accounting Practice prepares main residence exemption positions before properties are sold, not after: full and partial exemption calculations, home-business apportionment, absence rule elections, deceased estate timing, 2-hectare planning and foreign residency reviews. We keep the supporting evidence — valuations, floor plans, dates — on file in Karbon so that when you sell, the answer is ready and defensible.

Get your main residence exemption reviewed by Trinity →

General advice only. This article contains general information current as at June 2026 and does not constitute tax, financial or legal advice. It does not take into account your personal circumstances, objectives or needs. Before acting on any information in this article, you should consider its appropriateness to your situation and seek professional advice from Trinity Accounting Practice or another qualified adviser. Liability limited by a scheme approved under Professional Standards Legislation.