CGT and the Family Home: When Your Main Residence Isn’t Fully Exempt
Most Australians assume their family home is completely free from Capital Gains Tax (CGT). While the main residence exemption often applies, the rules become complicated when the home is also used to earn income, such as renting out part of it, operating a business, or temporarily relocating.
At Dolman Bateman, we help clients avoid surprise tax bills by understanding how partial exemptions work and how to plan ahead.
The Main Residence Exemption | A Quick Refresher
Your home is usually fully exempt from CGT if:
You lived in it for the entire ownership period
The land is two hectares or less
It hasn’t been used to produce income
If these conditions aren’t met, only part of the gain may be exempt.
When the Exemption Is Reduced
1. Renting Out Part of Your Home
If you rent out a room through Airbnb or take on a long-term tenant, a portion of the home becomes taxable for CGT purposes.
The ATO looks at:
Floor area: rented area vs total home
Time: period rented vs total ownership
Interest deductibility test: even if you don’t claim deductions, if you could have claimed them, that part may still lose the exemption
Example: If 25% of your home is rented for 3 years of a 12-year ownership period, then 25% × 3/12 = 6.25% of the gain is taxable.
2. Running a Business from Home
Operating a home-based business (such as a clinic, salon, or consulting office) can also create partial CGT exposure. This happens when:
A specific area is set aside exclusively for business
You claim occupancy expenses (interest, rates, insurance) as deductions
By contrast, employees who only claim running expenses (electricity, internet, office supplies) generally do not affect the CGT exemption.
3. Moving Out and the Six-Year Rule
If you move out and rent your home, you may still be covered by the six-year absence rule:
You can treat the property as your main residence for up to six years while it is producing income
The rule resets if you move back in, each absence is tested separately
You can only apply this to one property at a time
If rented for more than six years, only the excess period is taxable
When a property is first used to produce income, the cost base is reset to market value at that time.
4. Vacant Land or Larger Blocks
The main residence exemption covers land up to two hectares. Any land beyond that may attract CGT. Even within two hectares, if part of the land is used for income (e.g. running a business), that part may be taxable.
Practical Tips to Manage Partial CGT Exposure
Keep records: dates, rental agreements, floor plans, valuations
Obtain a valuation: when first renting or using for business, to set a new cost base
Plan before you act: renting or converting space can have long-term tax consequences
Get advice early: CGT rules are technical, professional guidance can help reduce the risk of overpaying tax
Final Thoughts
The main residence exemption isn’t always all-or-nothing. Renting, business use, or extended absences can make part of your home taxable. With careful planning and accurate records, you can manage the exposure and avoid nasty surprises.
At Dolman Bateman, we guide clients through these rules so they can make confident decisions about their property and tax outcomes.
Disclaimer: The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. All content relates to the current financial year only. Future changes to tax laws, thresholds or administrative requirements may affect the accuracy or relevance of this information, so you should always confirm that the guidance remains current. While every effort has been made to ensure accuracy at the time of publication, Dolman Bateman accepts no responsibility or liability for any loss or damage arising from reliance on this information. You should seek professional advice tailored to your circumstances before making any financial or tax decision.
